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Extended Unemployment Benefits and Early Retirement: Program Complementarity and Program Substitution

Author Info

Listed author(s):
  • Lukas Inderbitzin

    ()

    (Swiss Institute for Empirical Economic Research, University of St. Gallen, Switzerland)

  • Stefan Staubli
  • Josef Zweimüller

Abstract

This paper explores how extended unemployment insurance (UI) benefits targeted to older workers affect early retirement and social welfare. The trade-off of optimal UI between consumption smoothing and moral hazard requires accounting for the entire early retirement system, which often includes extended UI and relaxed access to disability insurance (DI). We argue that extended UI generates program complementarity (increased take-up of UI followed by DI and/or regular retirement benefits) and program substitution (increased take-up of UI instead of DI). Exploiting Austria’s regional extended benefit program, which extended regular UI benefits to up to 4 years, we find: (i) program complementarity is quantitatively important for workers aged 50+; and (ii) program substitution is quantitatively relevant for workers aged 55+. We derive a simple rule for optimal UI that accounts for program complementarity and program substitution. Using the sufficient statistics approach, we conclude that UI for older workers was too generous and the regional extended benefit program was a suboptimal policy.

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File URL: http://www.econ.jku.at/papers/2013/wp1306.pdf
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Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2013-06.

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Length: 46 pages
Date of creation: Apr 2013
Handle: RePEc:jku:econwp:2013_06
Contact details of provider: Fax: +43 732-2468-8238
Web page: http://www.econ.jku.at/

More information through EDIRC

Keywords: Early retirement; unemployment; disability; policy reform; optimal benefits;

Other versions of this item:

Find related papers by JEL classification:
  • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
  • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
  • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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