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

  • Inderbitzin, Lukas

    ()

  • Staubli, Stefan

    ()

  • Zweimüller, Josef

    ()

This paper explores how extended unemployment insurance (UI) benefits targeted to older workers affect early retirement and social welfare. We argue that the analysis of UI's tradeoff between consumption smoothing and moral hazard needs to consider the entire early retirement system, which often consists of extended UI and relaxed access to disability insurance (DI). We argue that extended UI generates program complementarity (higher future take-up of DI and/or regular retirement benefits) or program substitution (lower contemporaneous take-up of DI benefits). 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 an optimal UI formula in the spirit of Baily (1978) and Chetty (2006) that features 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://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1323.pdf
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Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1323.

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Length: 51 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:usg:econwp:2013:23
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  4. Lex Borghans & Anne C. Gielen & Erzo F. P. Luttmer, 2014. "Social Support Substitution and the Earnings Rebound: Evidence from a Regression Discontinuity in Disability Insurance Reform," American Economic Journal: Economic Policy, American Economic Association, vol. 6(4), pages 34-70, November.
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  13. Susan Chen & Wilbert van der Klaauw, 2006. "The Work Disincentive Effects of the Disability Insurance Program in the 1990s," Working Papers 06-05, Center for Economic Studies, U.S. Census Bureau.
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  23. Karlström, Anders & Palme, Mårten & Svensson, Ingemar, 2008. "The employment effect of stricter rules for eligibility for DI: Evidence from a natural experiment in Sweden," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2071-2082, October.
  24. Chetty, Raj, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Scholarly Articles 9751256, Harvard University Department of Economics.
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