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How Changes in Financial Incentives Affect the Duration of Unemployment

  • Lalive, Rafael

    ()

    (University of Lausanne)

  • van Ours, Jan C.

    ()

    (Tilburg University)

  • Zweimüller, Josef

    ()

    (University of Zurich)

This paper studies how changes in the two key parameters of unemployment insurance – the benefit replacement rate (RR) and the potential duration of benefits (PBD) – affect the duration of unemployment. In 1989, the Austrian government made unemployment insurance more generous by changing, simultaneously, the maximum duration of regular unemployment benefits and the earnings replacement ratio. We find that increasing the replacement ratio has much weaker disincentive effects than increasing the maximum duration of benefits. We use these results to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system and costs due to behavioral responses of unemployed workers. Results indicate that costs due to behavioral responses are substantial.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1363.

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Length: 44 pages
Date of creation: Oct 2004
Date of revision:
Publication status: published in: Review of Economic Studies, 2006, 73 (4), 1009-1038
Handle: RePEc:iza:izadps:dp1363
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  1. Van den Berg, Gerard J., 2001. "Duration models: specification, identification and multiple durations," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 55, pages 3381-3460 Elsevier.
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  16. Lalive, Rafael & Zweimüller, Josef, 2002. "Benefit Entitlement and Unemployment Duration: The Role of Policy Endogeneity," CEPR Discussion Papers 3363, C.E.P.R. Discussion Papers.
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