Abstract
This paper uses microdata to evaluate the impact on the steady-state unemployment rate of an increase in maximum benefit duration. We evaluate a policy change in Austria that extended maximum benefit duration and use this policy change to estimate the causal impact of benefit duration on labor market flows. We find that the policy change leads to a significant increase in the steady-state unemployment rate and, surprisingly, most of this increase is due to an increase in the inflow into rather than the outflow from unemployment.
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Notes
There are cross-country studies that relate aggregate parameters of the unemployment insurance system—i.e. average replacement rate and average benefit duration—and other labor market institutions in various countries to the aggregate unemployment rates in these countries. See for an overview Layard and Nickell (1999).
Note that Lalive and Zweimüller (2004a, b) also use Austrian data to analyze how unemployment benefits affect the outflow from unemployment but these studies are based on information from Austrian regions with a dominant steel industry. In these regions, in 1988 an extended benefit program was introduced for workers aged 50 or older. The focus of both studies is on policy endogeneity, which indeed turns out to introduce a substantial bias in the parameter estimates. In Lalive et al. (2006) and the current paper to avoid policy endogeneity problems the analysis excludes the steel dominated regions.
Note, however, that according to Fredriksson and Holmlund (2006) there is not much empirical evidence in support of such an effect.
Note that there is no theoretical explanation for the existence of end-of-benefit spikes. It could be that the spikes have to do with strategic timing of the job starting date, i.e. workers have already found a job but they postpone starting to work until their benefits are close to expiration. Card and Levine (2000) point at the possibility that there is an implicit contract between the unemployed worker and his previous employer to be rehired just before benefit expire.
The regional extended benefit program was implemented in 1987 and ended in 1993 and was directed to a subset of Austrian regions. (See Winter-Ebmer 1998, 2003 and Lalive and Zweimüller 2004a, b). The policy change analyzed here applies to workers in all other regions and excludes regions that were subject to the regional extended benefit program.
This so-called “Notstandshilfe” implies that job seekers who do not meet benefit eligibility criteria can apply at the beginning of their spell.
See Nickell and Layard (1999). It is interesting to note that the incidence of long-term unemployment in Austria is closer to U.S. figures than to those of other European countries. In 1995, when our sample period ends, 17.4% of the unemployment stock were spells with an elapsed duration of 12 months or more. This compares to 9.7% for the U.S. and to 45.6% for France, 48.3% for Germany, and 62.7% for Italy (OECD 1999).
UB duration was 20 weeks for job-seekers who did not meet this requirement. This paper focuses on individuals who were entitled to at least 30 weeks of benefits.
This so-called Krisenregionsregelung applied to about 15% of all observations. In these crises- ridden regions even more generous unemployed insurance policies were implemented between 1988 and 1993. For empirical analyzes of these programs, see Winter-Ebmer (1998, 2003) and Lalive and Zweimüller (2004a, b).
The higher fraction of ages 50 + is because the big birth cohorts of 1940–1942 are in the age group 40–49 in the before-policy sample whereas they are in the age group 50 + in the after-policy sample. The higher fraction of females in the after-policy sample is most likely due to the fact that the cohorts that are in the after-policy but not in the before-policy sample have a high labor force participation and are relatively large (vintages in the mid 1950s). In contrast, the cohorts that are in the before-policy sample but not in the after-policy sample (vintages of the early 1930s) do have a low labor force participation and are comparably small.
All observations in our samples for which both T39 i = 0 and T52 i = 0 are eligible for at most 30 weeks of benefits.
The vector of individual characteristics includes the individual’s age, age dummies, dummies for the inflow quarter, log daily wage, experience, tenure, broad occupation (blue/white collar), sex, and industry (manufacturing, construction/tourism, other industries).
The analysis below will be undertaken also for more flexible specifications of age and calendar time, and will be estimated for various subgroups to assess the robustness of the results.
If policy was implemented because policy makers became concerned with worse labor market prospects for older individuals there would be policy endogeneity.
With respect to the effect of PBD on the unemployment outflow, our results are in line with the estimates in Lalive et al. (2006) who find that the increase in PBD from 30 to 52 weeks lead to an increase in the expected duration of unemployment of 12.3% and who find a very small effect of the increase in PBD from 30 to 39 weeks. Our results are also similar to previous estimate to Winter-Ebmer (2003) who finds substantial effects of PBD on the unemployment inflow for a different policy change in Austria, which extended PBD for older worker in certain regions.
Note that this result is very much in line with our earlier results on the effects of PBD extensions in Austria (Lalive et al. 2006) suggesting that extending PBD from 30 to 52 weeks increases unemployment duration by 2.27 weeks which is about 12% of average unemployment duration.
As indicated before, our sample contains attached workers for which the unemployment rate is rather low. For example, in the third quarter of 1988 the average unemployment rate in our sample was 2.04%.
Note that the outflow result is, again, very much in line with our earlier result for Austria (Lalive et al. 2006) suggesting that extending PBD from 30 to 39 weeks increases unemployment duration by 0.45 weeks which is about 2% of average unemployment duration.
Note that in the simulations we use all estimated parameters of Table 6 irrespective of whether or not they are significantly different from zero at conventional levels of significance.
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Acknowledgements
We thank the editor, Christian Dustmann, and three anonymous referees for helpful comments and suggestions. Andreas Steinhauer and Oliver Ruf did excellent research assistance. Financial support by the Austrian Science Fund (National Research Network S103: “The Austrian Center for Labor Economics and the Analysis of the Welfare State”) is gratefully acknowledged.
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Lalive, R., van Ours, J.C. & Zweimüller, J. Equilibrium unemployment and the duration of unemployment benefits. J Popul Econ 24, 1385–1409 (2011). https://doi.org/10.1007/s00148-010-0318-8
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DOI: https://doi.org/10.1007/s00148-010-0318-8