Unemployment Insurance Schemes, Liquidity Constraints and Re-employment: a three Country Comparison

We examine how unemployment schemes and liquidity constraints affect re-employment probabilities and unemployment duration. In particular we investigate to which extent those schemes, through employment services and search requirements, can offset the expected perverse effect of benefits on reservation wages and search effort. Similarly, given that liquidity constraints and financial pressure should also affect reservation wage and search effort we analyze whether better economic conditions of individuals actually increase duration. We perform the analysis on Finland, Italy and Poland, countries that displays significant differences both in the UI schemes generosity and eligibility criteria and in the overall degree of social wealth and economic prosperity. Using a sample of newly unemployed from these countries, we perform and estimation of Cox hazard models and assess what variables are important in determining unemployment duration. Our findings suggest that even correctly designed UI schemes have a mixed effect: initially they give incentive to increase search effort, as the eligibility criteria impose certain search requirements, but with time they simply reduces liquidity constraints and thus increase duration. As for the direct effect of liquidity constraints and financial pressure we found that in Italy and Poland they appear to reduce unemployment duration but they are not relevant in Finland, suggesting that these aspects are not so important in countries that are particularly rich and with a developed welfare system.