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The optimal timing of unemployment benefits: theory and evidence from Sweden

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  • Kolsrud, Jonas
  • Landais, Camille
  • Nilsson, J. Peter
  • Spinnewijn, Johannes

Abstract

This paper provides a simple, yet robust framework to evaluate the time profile of benefits paid during an unemployment spell. We derive sufficient-statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell. Our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare-improving changes in the benefit profile that account for all relevant arguments jointly. For the empirical implementation, we use administrative data on unemployment, linked to data on consumption, income, and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that, if anything, the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. In trading off insurance and incentives, our analysis suggests that the at benefit profile in Sweden has been too generous overall. However, both from the insurance and the incentives side, we find no evidence to support the introduction of a declining tilt in the profile.

Suggested Citation

  • Kolsrud, Jonas & Landais, Camille & Nilsson, J. Peter & Spinnewijn, Johannes, 2018. "The optimal timing of unemployment benefits: theory and evidence from Sweden," LSE Research Online Documents on Economics 86379, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:86379
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    File URL: http://eprints.lse.ac.uk/86379/
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    References listed on IDEAS

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    More about this item

    Keywords

    unemployment; dynamic policy; sufficient statistics; consumption soothing; 716485;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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