Does reducing unemployment insurance generosity reduce job match quality?

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Abstract

This paper analyzes how a change in Slovenia's unemployment insurance law affected the quality of jobs workers found after periods of unemployment. Taking advantage the “natural experiment” we show through difference-in-differences estimation results that reducing the potential duration of unemployment benefits had no detectable effect on wages, on the probability of securing a permanent rather than a temporary job, or on the duration of the post-unemployment job.

Section snippets

The reform in Slovenia's unemployment insurance system

Like most OECD countries, Slovenia provides unemployment benefits through a social insurance program covering all formal sector workers.3 To qualify for benefits, a worker must be enrolled in the program and the job loss must have been involuntary (disciplinary dismissals are excluded). To maintain the entitlement, applicants must be capable

Exploiting the natural experiment of unemployment benefit reform

Empirically testing how unemployment benefits affect post-unemployment job matches is complicated by the fact that factors responsible for variations in benefit generosity among workers also often affect post-unemployment job characteristics and wages. Our strategy for isolating these effects was to exploit the exogenous variation in the generosity of benefits introduced by the 1998 reform of Slovenia's unemployment insurance law, a variation that warrants a difference-in-differences approach.

Wages in post-unemployment jobs

Table 2 provides stylized facts about the evolution of wages. When wages in post-unemployment jobs are compared with wages in pre-unemployment jobs, wage increases are smaller after benefit reform than before. Of course, this may have to do with a change in inflation. What is important is that the differences in wage changes do not seem to be related to how much the potential benefit duration was reduced. For the male control group with no change in PBD, the difference in wage change equals − 

Conclusions

The efficiency properties of unemployment insurance are theoretically ambiguous and empirically controversial. This paper sheds light on one aspect of that controversy: how unemployment benefits affect the quality of post-unemployment jobs. Even if unemployment benefits increase the length of time benefit recipients are unemployed – a well-established empirical fact for most unemployment insurance systems – might they at the same time improve the quality of jobs workers find after the period of

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The authors wish to thank the National Employment Office of Slovenia, the Statistical Office of Slovenia and the Pension and Disability Fund of Slovenia for providing the data used in this study. Jakob Tomse provided excellent assistance in setting up the data sets. The authors also thank participants of seminars at IZA (Bonn), QUT (Brisbane), Melbourne University, RWI (Essen), and University of Salerno for their comments. Support from the World Bank research project “Incentive Effects of UI Systems in Transition Countries” (RF-P087059-RESE-BBRSB) is gratefully acknowledged.

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