What are we talking about?

• Unemployment benefits offer replacement income to workers experiencing unemployment spells. In principle should protect

jobseekers

rather than

jobholders

(as EPL, Chapter 10).

• The first UB system was introduced in the UK in 1911. Beneficiaries considered “on the dole”.

• Complex design to discourage opportunistic behavior

Outline

• Measures and cross-country comparisons • Theory – A Competitive Labor Market – An Imperfect Labor Market • Empirical evidence – effects of UBs on reservation wages – effects of UBs on unemployment duration – effects of unemployment on UBs

Outline (cont.)

• Policy issues – Why and when should UBs be publicly provided?

– Optimal structure of UBs • Why do Unemployment Benefits exist?

Measures and cross country comparisons

Multidimensional institution

• Different features characterise a UB system: –

level

of the income transfer wrt to the previous (future) wage – maximum

duration

for which they can be offered –

eligibility

conditions (conditions for access) –

entitlement

(rules for duration including sanctions after assessment of search intensity)

Measures and cross country comparisons

Measures of the generosity of UBs

•

Replacement rates (rr)

: subsidies as a fraction of the previous (backward looking) or potential (forward looking) earnings • Replacement rate can be computed

net

or

gross

of taxes • At different unemployment durations • For different household characteristics

Measures and cross country comparisons

Many numbers, one single indicator?

“Summary measure of benefit generosity” (OECD, Jobs Study): average of replacement rates in the first two years of unemployment for Average Production Worker (APW) with seniority sufficiently long to yield maximum duration of UBs

Measures and cross country comparisons

Shortcomings of replacement rate measures

• Neglect the coverage of the subsidies (fraction of unemployed receiving the benefit) • However coverage is partly endogenous (% of youngsters, without work experience) • Do not consider the entitlement conditions (categorical vs. means-tested)

80 70 60 20 10 0 50 40 30

Summary generosity at 5 years

Unemployment Benefit Five-year average

Measures and cross country comparisons

Unemployment Insurance and Unemployment Assistance

Unemployment Insurance (UI) principle/component:

– Benefit depends on payments during past work experience – Offers provisions proportional to past earnings – The length of the entitlement period is dependent on the length of the contribution period.

– Some “experience-rating” (e.g., in the US) with employers paying more if they use it (like a fringe)

Measures and cross country comparisons

Unemployment Assistance component of UB (UA)

– Accessible indipendently of (if any) payments during the past working experience – Flat subsidy: provisions indipendent of past earnings – Entitlement not conditional on the length of the contribution period.

Measures and cross country comparisons

Economically relevant distinction

• Each UB system includes both components, unemployment insurance and unemployment assistance • In economics, the most important distinction is between the

cathegorical

and the

means-tested

components • the former can be analyzed mainly in terms of

individual

incentives and disincentives • the latter necessarily requires an analysis of labor supply at the

household

level (Chapter 7)

Net Replacement Rates for four family types at two earnings levels

After tax and including family and housing benefits for

long-term

benefit recipients (1999-2000) Canada France 1 Germany 1 Greece 1 Ireland 2 Italy 3 Luxembourg Norway Sweden 4 United Kingdom United States 24 30 54 8 31 0 50 66 54 46 7

Single Married couple

41 28 52 8 43 4 67 67 71 57 12 APW - level

Couple 2 children

62 42 65 10 56 18 75 74 85 80 46

Lone parent 2 children

60 43 63 11 56 14 59 83 59 71 38

Single

35 43 63 8 41 0 70 65 79 66 10 66.7% of APW – level

Married couple

57 41 61 8 59 5 92 67 102 80 17

Couple 2 children

81 59 71 11 66 21 93 82 110 88 59

Note:

1. NNRs are based on SA except in France, Germany, Greece, where NRRs are based on unemployment assistance. 2. Housing benefits are not included due to very small number of recipients. 3. Social assistance (

Reddito minimo di inserimento

) is not included in Net Replacement Rates due to its experimental character (on trial in 39 municipalities). NRR are based on family benefits. 4. People in work are not entitled to social assistance.

Source: OECD tax-benefit models

Lone parent 2 children

80 60 71 12 64 17 82 90 70 81 48

UBs often operate in connection with..

Non-employment benefits

(other income transfers to non-employed individuals in working age) such as: – Social assistance of the last resort (different from unemployment assistance) – Early retirement (Chapter 6) – Liberal access to invalidity pensions – Sickness benefits.

Non-employment benefits UB Social Assistance Early Retirement Liberal access Invalidity Insurance Assistance

Measures and cross country comparisons

Summarizing evolution of UBs

• Increasing generosity up to the 1980s, especially in Europe. Levelling off or small decline in the 1990s • Net rr on average 2/3 higher than gross • Increasing sanctions for refusal of jobs or ALMP • Relatively low coverage notably in Southern Europe

Effects on individual labour supply

• Labor/leisure choice affected by non-work income • Budget constraint with

spike

in correspondence to 0 earnings (under cathegorical conditions) • Substitution effect discourages work • Negative net wage at low hours • Increase in the reservation wage of unemployed benefit

recipients

Theory

c c A m w r < w c wl 0 A w w r u (c,l)=k 1 u (c,l)=k 2 l h A l 0 m+b m w r > w w r w B u (c,l)=k 3 l l 0

Reservation wage without (Left Panel) and with (Right Panel) unemployment benefits

Effects on the reservation wage • Unemployment benefits increase the reservation wage of individuals receiving UBs (may reduce the one of jobseekers not receiving UBs) • If minimum guaranteed income UA scheme, then wage rate of zero at the participation margin

Theory

In Imperfect Labor Markets

• • • • 3 effects

Job search effect

(on dynamic reservation wage)

Wage effect

(on the bargaining outcome and via an increase of efficiency wages)

Entitlement effect

(increase in participation of those not receiving UBs) Also tax effect (Chapter 4) related to funding of UBs

Theory

Job search effect

• Jobseekers become more choosy. Longer duration of unemployment among UB recipients.

• They only accept job offers involving a higher wage • This higher (dynamic) reservation wage discriminates between unemployment and employment (unlike the static reservation wage separating employment and non-employment)

Theory

Why links with SA are so important

Wage effect

• Higher outside option of workers at the bargaining table (pure bargaining effect) • Higher wage is required to deter shirking (efficiency wage effect). The penalty associated with unemployment (the disciplining device, see box 11.2) is reduced in presence of UBs

Theory

Entitlement effect

• UBs increase the value of employment • More participation in the labor market (shifts across participation margins) • Lower reservation wage of jobseekers not receiving UBs. Higher job finding rates of unemployed not eligible to UBs.

Theory

Empirical evidence

Empirical evidence

• Receipt of benefits increase reported reservation wages • Longer duration of benefits correlated with longer duration of unemployment • Unemployment outflows increase in proximity of the maximum duration of benefits • Presence of spillovers between recipients and non recipients of UB: also labor supply enhancing effects (as predicted by entitlement effect)

Reservation Wages of the Unemployed; 1995

(Estimates of Mincer-type reservation wage equations)

gender (M=1) age age^2

level of education:

primary or lower tertiary

type of job being seeked

in the private sector part-time within commuting distance

labour market status

first-time jobseeker unemployment benefit recipient

relation with head of household

husband/wife son/daughter relative nr of family members

local conditions

unemployment rate (district-level) dummy North-West dummy Center dummy South constant

coeff

0.0593

0.0200

-0.0003

-0.1370

-0.2023

-0.0432

-0.2300

-0.0123

0.0039

0.0489

-0.0894

-0.0694

-0.0854

0.0021

0.0358

0.0435

0.1115

13.9764

Mills lambda R2 n 0.1242

5112 ** ** ** ** ** ***

sig

** *** *** ** ** ** ** ** *** ** ** *

st. error

0.0127

0.0030

0.0000

0.0272

0.0274

0.0183

0.0153

0.0106

0.0127

0.0223

0.0196

0.0195

0.0295

0.0044

0.0199

0.0199

0.0182

0.0731

coeff

0.0585

0.0196

-0.0002

-0.1385

-0.2053

-0.0435

-0.2298

-0.0135

-0.0010

0.0517

-0.0887

-0.0691

-0.0836

0.0013

0.4793

0.0319

0.0269

0.0460

13.9493

0.1276

5112 ** *** *** ***

sig

** *** *** *** *** ** *** *** ** ***

st. error

0.0234

0.0030

0.0000

0.0271

0.0274

0.0182

0.0153

0.0106

0.0127

0.0222

0.0195

0.0195

0.0295

0.0044

0.1075

0.0199

0.0202

0.0234

0.0732

coeff

0.0274

-0.0003

-0.1265

-0.2108

-0.0269

-0.2237

-0.0134

0.0005

0.0483

-0.0589

-0.0574

-0.1093

0.0060

sig

*** *** *** *** *** ** * * **

st. error

0.0056

0.0001

0.0445

0.0446

0.0308

0.0247

0.0108

0.0129

0.0216

0.0335

0.0318

0.0495

0.0074

0.1136

0.0340

0.0744

13.8686

-1.7710

*** ** *** *** 0.0416

0.0325

0.0321

0.1247

0.6008

5112

Empirical evidence

UB and unemployment duration

• Level of benefits – elasticity w.r.t. duration – Layard et al. (1991) 0.2-0.9

– Carling et al. (2001) Sweden: 1.7

– Roed and Zhang (2003) Norway: 0.35-0.95

– Van Ours and Vodopivec (2004): 1.4

• Potential benefit duration 1 week longer – Katz and Meyer (1990) US: 0.16-0.20 weeks more unemployment – Ham et al. (1998) Czech-Slovak Republics: 0.30-0.93 weeks more unemployment – Van Ours and Vodopivec (2004): 0.86 weeks more

Empirical evidence

Duration analysis

• Retrospective data, matched records across LFS or administrative (social security) records • Problems with survey data: recall bias, lenght-biased sampling, right-censoring • Problems with administrative records: recording affected by regulations (e.g., coverage)

Empirical evidence

Unemployment hazard rates

• The hazard rate, λ , is the conditional probability of leaving unemployment (e.g., probability that an individual leaves U in the 10th week given that she has been U for 9 weeks) after a certain period of time • If constant, then the (conditional) (survival) probability of leaving U at the 10th day is f(10)=λ(1-λ) 9 where λ is the hazard • More generally , λ(i) is the

hazard function

Empirical evidence

Natural Experiments

• (vanOurs-Vodopivec) Reform in Slovenia reducing potential benefit duration • Maximum benefit duration dependent on previous work experience (months): – 3 to 3, 6 to 3, 9 to 6, 12 to 6, 18 to 9, 24 to 9, 24 to 12, 24 to 18, 24 to 24. • October 1987 • Examples 12 to 6 – both outflow to job and to other destinations increases

Eligibility 12 months before - 6 months after 0,3 0,25 0,2 0,15 0,1 0,05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Months of unemployment Before After

Empirical evidence

Entitlement effects

• Incentives to accept also risky jobs (precarious or with temporary spells) for the outsiders • May improve mobility in economies experiencing structural change if in the declining sector there is wage compression • May also decrease the reservation wage and reduce unemployment

Empirical evidence

Policy endogeneity

• Extended duration of unemployment. Benefits often granted as policy response to crises • Regionally adjusted UBs in the US (Card and Levine, 2000) • Austrian Regional Extended Benefits Program (Lalive-Zweimueller, 2002): benefits extended from 30 up to 209 weeks

Empirical evidence

Empirical findings

• Policy endogeneity is significant • Estimates of the effects of UB duration on LTU likely to be biased upwards • Yet it is still there: in Austria increase in benefit duration from 30 to 209 weeks reduces the transition to jobs by 17% (40% without correcting for endogeneity), increasing expected unemployment duration by 9 weeks

Policy issues

Trade-offs in the provision of UB

• Reduced incentives to work • Fiscal costs • Better risk sharing (with risk-averse workers) Increase in welfare • Spillovers: workers encouraged to take risky, high-productivity, jobs • Subsidy to job search, matching efficiency. Acemoglu-Shimer: there can be productivity gains by raising UB in the US to European levels

Policy issues

Possible private provision of unemployment insurance?

• No because moral hazard and adverse selection. Asymmetric information.

• Workers can alter the probability of losing a job • Private insurance would ask for premia selecting only workers with higher than average risk • Risk pooling problem: risks are correlated (e.g., during recession)

Policy issues

Optimal design of UBs dealing with the agency problem

• Public provider faces the same moral-hazard problems (as compulsory contributions, less adverse selection), related to the non-verifiability of search effort. • Ways to reduce disincentives to seek jobs.

• Low replacement rates, declining with unemployment duration. Administrative pressure on recipients (“help and hassle”). Offer of slots in ALMPs as a way to elicit effort • Financial incentives to the take-up of jobs: premia in terms of residual benefit claims and ECI

Policy issues

Why do UBs exist?

• Properly designed UBs improve the allocation of human capital and thus, foster economic growth. • However, UBs should not be too generous in order not to discourage job search altogether and generate stagnant unemployment pools.

• The most relevant issues do not concern whether or not a country should have a UB system, but how the system should be designed along its several dimensions. Difficult to reform once in place.

Policy issues

Politically feasible reforms

• Exploiting the UB/EPL tradeoff, e.g., increasing the degree of experience-rating • Grandfather existing entitlements • Change enforcement more than rules • Combine benefit cuts with employment conditional benefits or wage subsidies; way to win support by employees and reduce the opposition of the unemployed

Date of First Introduction of UBs

1905-1944

Australia Belgium Canada Chile Denmark Finland France Germany Ireland Italy New Zealand Norway Spain Sweden United Kingdom USA

1945-1979

Austria Bangladesh Croatia Ecuador Egypt Greece Hong Kong Iraq Israel Japan Netherlands Nigeria Portugal Serbia Slovenia South Africa

1980-1990

Brazil Bulgaria China Colombia Georgia Hungary Iran Poland Sri Lanka Uruguay

1991-1992

Argentina Armenia Azerbaijan Belarus Estonia Czech Republic Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Russia Turkmenistan Ukraine Uzbekistan Romania Slovak Republic

1993-2002

Albania Algeria South Korea Taiwan Tunisia Turkey Source: Social Security Programs Throughout the World and our own research based on administrative sources.

Dynamic Effect of UBs on Job Destruction -- Reallocation

Dynamic effect of UBs on Job Destruction (JD) (coefficients and confidence intervals)

Review questions

• Why do replacement rates offer an incomplete measure of the generosity of unemployment benefits?

• Do unemployment benefits redistribute in favor of low-skilled workers?

• What effects should we expect UBs to have on first-time jobseekers when benefits are conditional on previous work experience?

• How does the introduction of a UB system affect labor force participation?

Review questions (cont.)

• What is the hazard rate?

• What type of relation do we expect to observe between generosity of UBs and structural change?

• Why is unemployment insurance not provided by private insurance companies?

• Is there a socially optimal replacement rate?

• Should UBs be experience rated?

Practicing with real data

• Box 11.3:How shortering the potential duration of unemployment benefits affects the duration of unemployment: evidence from a natural experiment (pag. 241-242).

• A Stata data file with the Van Ours and Vodopivec (2006) dataset, a do file and a log file are available at the website: http://www.frdb.org/images/customer/vanours.zip

Source:

Tito Boeri and Jan van Ours (2008),

The Economics of Imperfect Labor Markets

, Princeton University Press.

Practicing with real data

• Box 11.4: The effect of benefit sanctions on the duration of unemployment (pag. 242-243).

• A Stata data file with the Lalive, van Ours, and Zweimuller (2006) dataset, a do file and a log file are available at the website: http://www.frdb.org/images/customer/lalive.zip

Source:

Tito Boeri and Jan van Ours (2008),

The Economics of Imperfect Labor Markets

, Princeton University Press.