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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. Addison, John T. & Portugal, Pedro, 2004. "How does the unemployment insurance system shape the time profile of jobless duration?," Economics Letters, Elsevier, vol. 85(2), pages 229-234, November.
  2. Rafael Lalive & Josef Zweimüller, . "Benefit Entitlement and Unemployment Duration - The Role of Policy Endogeneity," IEW - Working Papers 112, Institute for Empirical Research in Economics - University of Zurich.
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  24. Adamchik, Vera, 1999. " The Effect of Unemployment Benefits on the Probability of Re-employment in Poland," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(1), pages 95-108, February.
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