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Unemployment Traps: Do Financial Dis-incentives matter?

  • Pedersen, Peder J.

    ()

    (Centre for Labour Market and Social Research, Aarhus School of Business)

  • Smith, Nina

    ()

    (Centre for Labour Market and Social Research, Aarhus School of Business)

This paper analyses the importance of financial dis-incentives for workers in Denmark. Based on a panel survey which is merged to a number of administrative registers it is possible to calculate precise measures of the economic incentives for labour force participants between employment in a full time job and being on unemployment insurance benefits and considering also the fixed costs of work. The results indicate large dis-incentives effects for groups, especially low paid women. In 1996, 6 per cent of Danish men and 13 per cent of the women had a lower disposable net income if working a full-time job compared to being on unemployment benefits. The effect of these financial dis-incentives is analysed in simple reduced form models of on-the-job search, unemployment search behaviour, unemployment risk, and transition out of the labour force. We find that the net compensation rate in unemployment has a significant impact on women's propensity to leave the labour force, on measures of search intensity, on the risk of being hit by unemployment and on one of our flexibility measures, i.e. the maximum acceptable commuting time to a job. The net compensation rate has no impact on the willingness to move to another place to get a job. However, here we find a significant impact from job attitude related measures. We end the paper reporting the results from including attitude variables along with economic variables. We find a number of significant effects from attitude variables. However, the main conclusion is that economic incentives dominate the present analysis of unemployment traps.

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Paper provided by University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research in its series CLS Working Papers with number 01-1.

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Length: 29 pages
Date of creation: 27 Jun 2002
Date of revision:
Handle: RePEc:hhs:aarcls:2001_001
Note: Published in: Peder J. Pedersen & Nina Smith. Unemployment Traps: Do Financial Dis-incentives matter?. European Sociological Review. 2002: 271-288.
Contact details of provider: Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Phone: +45 89 48 66 88
Fax: + 45 86 15 01 88
Web page: http://www.cls.dk

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  1. N. Eissa & H. W. Hoynes, . "The Earned Income Tax Credit and the Labor Supply of Married Couples," Institute for Research on Poverty Discussion Papers 1194-99, University of Wisconsin Institute for Research on Poverty.
  2. Graversen, E.K. & Smith, N., 1998. "Labour Supply, Overtime Work and Taxation in Denmark," Papers 98-06, Centre for Labour Market and Social Research, Danmark-.
  3. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  4. Pissarides, C. & Wadsworth, J., 1988. "On-The-Job Search: Some Empirical Evidence," Papers 317, London School of Economics - Centre for Labour Economics.
  5. Callan, T. & Dex, S. & Smith, N. & Vlasblom, J.D., 1999. "Taxation of Spouses: a Cross-Country Study of the Effects on Maaried Women's Labour Supply," Papers 99-02, Centre for Labour Market and Social Research, Danmark-.
  6. Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," CEPR Discussion Papers 380, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  7. Atkinson, A.B., 1987. "Income maintenance and social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 13, pages 779-908 Elsevier.
  8. Christopher Pissarides, 1997. "The impact of employment tax cuts on unemployment and wages : the role of unemployment benefits and tax structure," LSE Research Online Documents on Economics 2332, London School of Economics and Political Science, LSE Library.
  9. Andrew Dilnot & Alan Duncan, 1992. "Lone mothers, family credit and paid work," Fiscal Studies, Institute for Fiscal Studies, vol. 13(1), pages 1-21, February.
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