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

Listed author(s):
  • 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://ux-tauri.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
Handle: RePEc:usg:econwp:2013:23
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  2. 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.
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  8. Staubli, Stefan, 2011. "The impact of stricter criteria for disability insurance on labor force participation," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1223-1235, October.
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  17. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
  18. Levon Barseghyan & Jeffrey Prince & Joshua C. Teitelbaum, 2011. "Are Risk Preferences Stable across Contexts? Evidence from Insurance Data," American Economic Review, American Economic Association, vol. 101(2), pages 591-631, April.
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  20. Staubli, Stefan & Zweimüller, Josef, 2011. "Does Raising the Retirement Age Increase Employment of Older Workers?," CEPR Discussion Papers 8510, C.E.P.R. Discussion Papers.
  21. Tomi Kyyrä & Ralf Wilke, 2004. "Reduction in the Long-Term Unemployment of the Elderly: A Success Story from Finland," Discussion Papers 346, Government Institute for Economic Research Finland (VATT).
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  23. Johannes F. Schmieder & Till von Wachter & Stefan Bender, 2012. "The Effects of Extended Unemployment Insurance Over the Business Cycle: Evidence from Regression Discontinuity Estimates Over 20 Years," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 701-752.
  24. 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.
  25. Camille Landais, 2015. "Assessing the Welfare Effects of Unemployment Benefits Using the Regression Kink Design," American Economic Journal: Economic Policy, American Economic Association, vol. 7(4), pages 243-278, November.
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  28. Spinnewijn, Johannes, 2013. "Training and search during unemployment," Journal of Public Economics, Elsevier, vol. 99(C), pages 49-65.
  29. Duggan, Mark & Singleton, Perry & Song, Jae, 2007. "Aching to retire? The rise in the full retirement age and its impact on the social security disability rolls," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1327-1350, August.
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