Working Paper: CEPR ID: DP4986
Authors: Rafael Lalive; Jan C. van Ours; Josef Zweimüller
Abstract: 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 behavioural responses of unemployed workers. Results indicate that costs due to behavioural responses are substantial.
Keywords: maximum benefit duration; policy change; replacement rate; unemployment duration; unemployment insurance
JEL Codes: C41; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing the benefit replacement rate (rr) (H55) | Weaker disincentive effects (H31) |
| Increasing the maximum duration of benefits (pbd) (H55) | Transition rates from unemployment to employment (J69) |
| Combination of increased pbd and rr (C39) | Excess effect on unemployment duration (C41) |
| Extending potential benefit duration by 9 weeks (C41) | Increase in expected unemployment duration by 45 weeks (J65) |
| Extending potential benefit duration by 22 weeks (C41) | Increase in expected unemployment duration by 23 weeks (J65) |
| Increase in rr by 6 percentage points (C29) | Increase in unemployment duration by 38 weeks (J65) |
| Changes to pbd (F29) | Stronger disincentive effects compared to changes in rr (H31) |
| Combined interventions (increased pbd and rr) (C92) | No additional disincentive effects beyond isolated changes (H31) |