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How changes in Financial Incentives Affect the Duration of Unemployment

  • Rafael Lalive
  • Jan van Ours
  • Josef Zweimüller

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 Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 206.

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Handle: RePEc:zur:iewwpx:206
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  3. Rafael Lalive & Josef Zweimüller, . "Benefit Entitlement and the Labor Market: Evidence from a Large-Scale Policy Change," IEW - Working Papers 105, Institute for Empirical Research in Economics - University of Zurich.
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  15. Winter-Ebmer, Rudolf, 1996. "Potential Unemployment Benefit Duration and Spell Length: Lessons from a Quasi-experiment in Austria," CEPR Discussion Papers 1534, C.E.P.R. Discussion Papers.
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  17. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
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  19. Van den Berg, Gerard J., 2000. "Duration Models: Specification, Identification, and Multiple Durations," MPRA Paper 9446, University Library of Munich, Germany.
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  24. Lalive, Rafael & Zweimüller, Josef, 2002. "Benefit Entitlement and Unemployment Duration: The Role of Policy Endogeneity," CEPR Discussion Papers 3363, C.E.P.R. Discussion Papers.
  25. Patrick A. Puhani, 2000. "Poland on the dole: The effect of reducing the unemployment benefit entitlement period during transition," Journal of Population Economics, Springer, vol. 13(1), pages 35-44.
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  27. 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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