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Business Cycle, unemployment Trap and Effects of Economic Incentives on Job Finding Probability


  • Kyyrä, Tomi
  • Holm, Pasi
  • Rantala, Juha


This paper considers the sensitivity of the household's disposable income with respect to the labour market states and the labour market transitions of unemployed workers. The paper analyses the following questions: (i) which are the determinants of starting wages? (ii) how many unemployed are in the unemployment trap? (iii) how do economic incentives affect the conditional probability of finding a job? (iv) how sensitive are answers to above questions with respect to business cycle? The empirical analysis is based on the individual panel data covering the years 1987-1993, when the unemployment rate rose from about 4 % to 18 %. We have estimated the starting wage equation to calculate the effects of hypothetical re-employment on the household's disposable income and to evaluate the frequency of the unemployment trap. To analyse factors affecting the transition out of unemployment to employment in open labour market, we estimate unemployment duration using a semi-parametric proportional risk model. The paper shows that the impact of the economic incentives, measured by the hypothetical change in household's disposable income, on re-employment is more important in the recession than in the boom.

Suggested Citation

  • Kyyrä, Tomi & Holm, Pasi & Rantala, Juha, 1998. "Business Cycle, unemployment Trap and Effects of Economic Incentives on Job Finding Probability," Discussion Papers 175, VATT Institute for Economic Research.
  • Handle: RePEc:fer:dpaper:175

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    References listed on IDEAS

    1. Andrew Chesher & Tony Lancaster, 1983. "The Estimation of Models of Labour Market Behaviour," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 609-624.
    2. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-782, July.
    3. Carling, Kenneth & Edin, Per-Anders & Holmlund, Bertil & Jansson, Fredrik, 1995. "Unemployment Duration, Unemployment Benefits, and Labour Market Programmes in Sweden," CEPR Discussion Papers 1200, C.E.P.R. Discussion Papers.
    4. Narendranathan, W. & Stewart, M.B., 1989. "Modelling The Probability Of Leaving Unemployment: Competing Risks Models With Flexible Baseline Hazards," The Warwick Economics Research Paper Series (TWERPS) 331, University of Warwick, Department of Economics.
    5. Chesher, Andrew D, 1984. "Testing for Neglected Heterogeneity," Econometrica, Econometric Society, vol. 52(4), pages 865-872, July.
    6. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
    7. Reija Lilja, 1993. "Unemployment benefit system and unemployment duration in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 6(1), pages 25-37, Spring.
    8. Lippman, Steven A & McCall, John J, 1976. "The Economics of Job Search: A Survey," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 347-368, September.
    9. Green, David A & Riddell, W Craig, 1997. "Qualifying for Unemployment Insurance: An Empirical Analysis," Economic Journal, Royal Economic Society, vol. 107(440), pages 67-84, January.
    10. Arulampalam, Wiji & Stewart, Mark B, 1995. "The Determinants of Individual Unemployment Durations in an Era of High Unemployment," Economic Journal, Royal Economic Society, vol. 105(429), pages 321-332, March.
    11. Narendranathan, W & Nickell, S & Stern, J, 1985. "Unemployment Benefits Revisited," Economic Journal, Royal Economic Society, vol. 95(378), pages 307-329, June.
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