Working Paper: CEPR ID: DP10701
Authors: Jonas Kolsrud; Camille Landais; Peter Nilsson; Johannes Spinnewijn
Abstract: This paper provides a simple, yet general framework to analyze the optimal time profile of benefits during the unemployment spell. We derive simple sufficient-statistics formulae capturing the insurance value and incentive costs of unemployment benefits paid at different times during the unemployment spell. Our general approach allows to revisit and evaluate in a transparent way the separate arguments for inclining or declining profiles put forward in the theoretical literature. We then estimate our sufficient statistics using administrative data on unemployment, income and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption determining the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. On average, savings and credit play a limited role in smoothing consumption. Our evidence therefore indicate that the recent change from a flat to a declining benefit profile in Sweden has decreased welfare. In fact, the local welfare gains push towards an increasing rather than decreasing benefit profile over the spell.
Keywords: Consumption Smoothing; Dynamic Policy; Sufficient Statistics; Unemployment
JEL Codes: H20; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| moral hazard costs (G52) | unemployment duration (J64) |
| benefits paid in first 20 weeks (J32) | moral hazard costs (G52) |
| insurance value of benefits (G52) | unemployment duration (J64) |
| benefits structure (J32) | welfare (I38) |
| expenditures drop (H59) | unemployment duration (J64) |
| declining benefit profile (J32) | welfare (I38) |