Transcript Slide 1

Unemployment Insurance in Europe: unemployment
duration and subsequent employment stability
EPUNet Conference
8-9 May 2006
Barcelona
Konstantinos Tatsiramos
IZA, Bonn
1
Introduction
• Unemployment is a major issue especially in Europe:
– High unemployment rates – EU (9%), US (5.8%) (1990-2000)
– High incidence of long-term unemployment – EU (40%), US (<10%)
• Unemployment has economic and social consequences
(loss of skills, loss of income, poverty)
• EU “Lisbon Strategy” (2000):
– achieve full employment by creating more and better jobs
– attain higher geographic and occupational mobility
– improve skills and information on job opportunities
• Policy recommendations stress the importance of structural reforms:
– To make the labour market more flexible
– Work more attractive
– Develop human resources
2
Unemployment Insurance (UI)
• Supports the income of unemployed while searching for a new job
• Negative features of UI system:
– exert lower search effort - higher reservation wages
– longer unemployment duration –> long-term unemployment
• Positive features of UI system
– increase effectiveness of search activities – afford search costs
– increase efficiency of job matching – obtain the “right job”
– “Benefits allow the unemployed to search for a job which
matches their abilities, rather than being forced by financial
hardship into accepting the first available job offer “
Source: OECD Employment Outlook (1996)
3
Motivation
• The negative features have dominated the literature and
reform proposals, while little is known on the positive
features of UI
• The empirical literature has focused on the effect of UI
on the exit rate from unemployment emphasizing the
disincentive effects of UI
• Studies on the effect of UI on post-unemployment
outcomes have focused on re-employment wages, while
subsequent employment duration has been neglected
• There is no empirical evidence for Europe
4
Empirical Question
• Is there an effect of benefits on post-unemployment
employment stability?
• The focus is on employment duration as a measure of
employment stability
– Based on Jovanovic (1979) a good match lasts longer
– Akerlof, Rose and Yellen (1989) provide evidence that
nonpecuniary match aspects reduce the quit probability
• Hypothesis:
If UI has a post-unemployment beneficial effect then we
expect higher employment stability for recipients
5
Preview of Results
• Short run effect (on unemployment duration):
Benefits reduce the exit rate from unemployment
– Expected unemployment duration of recipients is higher than nonrecipients
– This is in line with the conventional results both in the theoretical and
empirical literature
• Long run effect (on employment duration):
Benefits reduce the exit rate from subsequent employment
– Recipients remain employed on average 4 months longer, which
represents a 20% increase relative to the average employment
duration. This partly offsets the short run effect of benefits
– This effect is pronounced (a) in countries with relatively more
generous benefits and (b) for recipients who have stayed for 6
months or more in unemployment
6
Plan of Talk
• Theoretical Background
• Empirical Literature
• Data Description
• Econometric Methodology
• Empirical Results
• Conclusions
7
Theoritical Framework (1)
• Convention: Benefits create disincentives
• Labor – Leisure model:

Lower opportunity cost of leisure (benefits ‘’subsidise’’ leisure)
• Job Search models:

Lower opportunity cost of unemployment
 Lower search effort
 Higher reservation wages
• Both models predict longer unemployment duration
8
Theoritical Framework (2)
Other results: Benefits might improve post-unemployment outcomes
• Higher reservation wages lead to higher re-employment wages
• More efficient search leads to increased quality of job match

Benefits as a ‘’search subsidy’’ as they lower opportunity cost of search
(Burdett, 1979)

Increased post-unemployment job stability as unemployed get the time to
find the ‘’right job’’ reducing job mismatch (Marimon&Zilibotti, 1999)
9
Empirical Literature
• UI leads to longer unemployment duration

Atkinson&Micklewright (1991), Devin&Kiefer (1991)
• UI on post – unemployment wages


Ehrenberg&Oaxaca (1976) – positive effect
Addison&Blackburn (2000) – weak effect
• UI on job stability

Belzil (2000) – positive but small effect (0.5-0.9 days of expected job
duration per additional week of benefits)
• Future entitlement of UI on Employment Duration
Baker&Rea (1998) – increase employment hazard
 Jurajda (2002) – increase layoff hazard

10
Data Description
• European Community Household Panel (1994 – 2001)
60,500 nationally representative households, 130,000 individuals (16+) for
the EU-15
•
Countries considered in this study:
Belgium, Denmark, France, Germany, Greece, Italy, Ireland, Portugal,
Spain, and UK
• Sample Strategy

Inflow sample of unemployed males, 18-60 years old

Construct individual labour market histories using the calendar of
activities (monthly information)

Multiple spells

Consider exits out of labour force as continued unemployment spells
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Table 1. Transitions in the sample
BEL
DK
FR
GER
GR
# Un Spells
246
352
842
1150
971
Exit to Emp
170
(69.11 %)
262
(74.43 %)
569
(67.58 %)
732
(63.65 %)
759
(78.17 %)
Exit Back to
Unem
62
(25.20 %)
92
(26.14 %)
223
(26.48 %)
314
(27.30 %)
483
(49.74 %)
IRE
IT
POR
SP
UK
# Un Spells
441
1364
640
2324
537
Exit to Emp
333
(75.51 %)
1012
(74.19 %)
446
(69.69 %)
1776
(76.42%)
422
(78.58 %)
Exit to
Unem
99
(22.45%)
559
(40.98 %)
172
(26.88 %)
977
(42.04%)
118
(21.97 %)
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• Information on benefits in ECHP
1) Question on receipt of benefits at interview
2 Question on amount of benefits received in previous year
Use both these variables to construct a benefit indicator and benefits
duration
• Benefit Indicator :
I(b≥t) equals 1 if b≥t and 0, otherwise
• Benefit duration (B)
 Observed only if B<T. Otherwise B=T
(Cannot estimate the effect of benefits as benefit termination gets
closer)
13
Figure 1. Type of Spells
A1
A
P
B
B1
C
1994
Wave 1
1995
Wave 2
1996
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Table 2. Summary Statistics
France
Germany
Italy
Portugal
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
Number of
Spells
479
363
758
392
280
1084
171
469
973
1351
187
350
Higher
Education
.163
.235 .164
.163
.039
.045
.018 .026 .101
.142
.438
.480
Secondary
Education
.447
.377 .580
.574
.257
.310
.122
.141
.192
.102
.109
Less than
Sec. Ed.
.390
.388 .256
.263
.704
.645
.860 .855 .758
.666
.460
.411
Age
34.6
32.4 39.0
36.7
39.4
33.7
40.2 33.8 37.5
32.6
36.5
34.9
Married
.399
.369 .626
.559
.704
.433
.719 .458 .659
.391
.481
.460
Number of
Kids
.852
.758 .767
.719
.936
.567
.848 .857 .906
.662
.936
.869
.119
Spain
UK
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Table 3. Characteristics of the Unemployment Insurance System
Employment/Contributions
conditions
Replacement Rate
(% of previous
gross earnings)
Duration
Belgium
312 days in 18 months to 624 days
in last 3 years, depending on age
60
No limit
Denmark
52 weeks in 3 years
90
1+3 years
France
4 months in 8 months
75
4-60 (A)
Germany
12 months in 3 years
60
12-64 (A+C)
125 in 14 months
40
5-12 (C)
Italy
52 weeks in 2 years
30
180 days
Ireland
39 weeks in 1 year
Flat Rate
390 days
Portugal
540 days in 2 years
65
12-30 (A)
12 months in 6 years
70
4-24 (C)
2 years
Flat Rate
182 days
Greece
Spain
United Kingdom
Source: European Commission Missoc 1994. (A) denotes that duration depends on age,
(C) on contributions
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Empirical Survival Functions by Benefits (Proportion
Remaining Unemployed)
1.000
0.800
0.600
1
0.400
6
12
0.200
BEL
DEN
FR
GER
GRE
IRE
IT
POR
SP
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
0.000
UK
17
Empirical Survival Functions by Benefits (Proportion
Remaining Employed)
1.000
0.800
0.600
1
0.400
6
0.200
12
BEL
DEN
FR
GER
GRE
IRE
IT
POR
SP
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
0.000
UK
18
Empirical Survival Functions by Benefits (Proportion
Remaining Employed for Previous Unempl > 6 months)
1.000
0.800
0.600
1
0.400
6
0.200
12
BEL
DEN
FR
GER
GRE
IRE
IT
POR
SP
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
NB
B
0.000
UK
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Econometric Methodology
• Two-state duration model
– Hazard rate: the probability to exit a state at a certain point in
time having being in that state up to that moment
– States
• Unemployment
• Subsequent employment
• Identification Assumption:
Following (Arellano, Bover, Bentolila, 2002), we assume a two
regime model

Effect of benefits on hazard is independent of remaining benefit duration
• Econometric Issues:
– Unobserved Heterogeneity
– Endogeneity of Benefit Indicator
20
Multispell Mixed Proportional Hazard Model with flexible baseline
hazard
 jik (t k |  jik )   jik (t )  exp(y jik )  v(  uik )
where j  u , e, while for u
yuik   ou  1u X uik   u bk (t )
(1)
(2)
and for e
yeik   oe  1e X eik   1ebek   2 e uk 1   3e uk 2 (3)
T he term jik (t ) representsthebaseline hazard
which capturesindividual durationdependence
21
T hecontribution of a completedunemployment and employment
spell conditional on  jik is
tj
f j (t j |  j )   j (t j |  j )  exp(   j ( s |  j )ds)
(4)
0
while thecontribution of a censored spell is given by
tj
S j (t j |  j )  exp(   j (t j |  j )ds)
(5)
0
T o accountfor endogeneity of benefitswe specify
a logistic process for benefitsas follows
 bik (tk |  uik )  P[bk (t )  1 | bk (t  1)  1, Tuik  tuik ,  uik )  ( ybik ) (6)
22
T helikelihoodfor theunemployment spells
with thebenefitsselectionequation can be writtenas
Lu   ([ f u (tu |  u )]cu [ Su (tu |  u )]1cu )[ f b (tu |  b )]bu dG( u ,  b ) (7)
T helikelihoodfor theemploymentspells can be writtenas
Le   ([ f e (te |  e )]ce [ S e (te |  e )]1ce )dG( e ) (8)
T he totalcontribution tothelikelihoodfor each individuals is
L   Lu  Lu dG( u ,  b ,  e ) (9)
23
We specifya discretedistribution for theunobservedheterogeneity
termfollowingHeckmanand Singer (1984)
Each unobservedfactoris assumed to be timeinvariantand individual specific,
and is allowed to be correlatedacross unemployment and employmentspells
Assuming a discretedistr. with twopointsof support
L  ( Lu ( H u |  u1 ,  b1 )  Le ( H e |  e1 ))   1  ( Lu ( H u |  u 2 ,  b 2 )  Le ( H e |  e 2 ))  (1   1 ) (10)
24
• Estimations performed by country:
– Unem. and Empl. separately without UH
– Unem. and Empl. separately with UH
– Unem. and Empl. jointly with correlated UH
• Unemployment Specification (with Benefit Selection)
– Dummy for receiving benefits
• Employment specification:
– Dummy for having received benefits during previous unemployment
spell
or
– Dummy for having received benefits interacted with previous
Unemployment Duration
– Other controls:
• education, age, married, spouse’s labor market status, number of kids, year
dummies, regional unemployment rate
25
Results – Without Unobserved Heterogeneity
BEL
DEN
FR
GER
GR
IREL
IT
POR
SP
UK
.280
(.079)
-.835
(.126)
-.234
(.052)
-.344
(.106)
.115
(.073)
.077
(.195)
.017
(.048)
.034
(.166)
Unemployment Duration
Benefits
-.432
(.185)
-.412
(.143)
-.396
(.088)
-.669
(.083)
.050
(.083)
-.510
(.128)
Employment Duration
Benefits
-.329
(.241)
-.054
(.228)
-.039
(.102)
-.048
(.095)
.100
(.072)
-.061
(.193)
Other Controls: education, age, married, spouse’s labor market status, number of kids, year dummies,
regional unemployment rate
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Results – With Unobserved Heterogeneity
BEL
DEN
FR
GER
GR
IREL
IT
POR
SP
UK
-.207*
(.125)
-1.204
(.163)
-.460
(.075)
-.345
(.143)
-.036
(.095)
.339
(.228)
-.052
(.062)
-.469
(.175)
Unemployment Duration
Benefits
-.460
(.225)
-.412
(.143)
-.396
(.088)
-.736
(.113)
-.234*
(.141)
-.561
(.199)
Employment Duration
Benefits
-1.832
(.310)
-.414*
(.222)
-.232*
(.139)
-.193*
(.115)
-.028
(.109)
.034
(.194)
Other Controls: education, age, married, spouse’s labor market status, number of kids, year dummies,
regional unemployment rate
27
Results – With Unobserved Heterogeneity (JOINT)
BEL
DEN
FR
GER
GR
IREL
IT
POR
SP
UK
-.207*
(.125)
-1.031
(.176)
-.358
(.067)
-.344
(.111)
-.404
(.101)
.256
(.215)
-.422
(.064)
-.364
(.177)
Unemployment Duration
Benefits
-.492
(.193)
-.446
(.147)
-.389
(.091)
-.742
(.095)
-.187
(.142)
-.525
(.199)
Employment Duration
Benefits
-1.539
(.284)
-.663
(.232)
-.352
(.222)
-.376
(.115)
-.148
(.125)
-.065
(.207)
Other Controls: education, age, married, spouse’s labor market status, number of kids, year dummies,
regional unemployment rate
28
Employment Duration: with UH and interactions (JOINT)
BEL
DEN
FR
GER
GR
IREL
IT
POR
SP
UK
Benefits -2.084
(.829)
-.284
(.720)
-.583
(.252)
-.223
(.312)
-.084
(.289)
-.335
(.446)
.289
(.275)
-.003
(.654)
-.441
(.162)
-.427
(.292)
Benefits 1.146
*Un Dur (.814)
(1-6)
-.377
(.767)
.168
(.307)
.014
(.321)
-.094
(.276)
.221
(.519)
-.811
(.276)
.538
(.664)
-.018
(.173)
.326
(.356)
Benefits .145
*Un Dur (.880)
(7-12)
-.693
(1.01)
.741*
(.429)
-1.232
(.399)
.081
(.336)
1.235*
(.642)
-.514*
(.307)
.043
(.748)
.122
(.191)
-.573
.602
Other Controls: education, age, married, spouse’s labor market status, number of kids, year dummies,
regional unemployment rate
29
Conclusions
• We analyse empirically the effect of UI on unemployment and
employment duration in a number of European countries
• Results show that benefits:
– Reduce the exit rate from unemployment
– Reduce also the exit rate from subsequent employment
• The effect is pronounced in countries with relatively more generous
beneftis
and
• For recipients who have stayed unemployed for 6 months or more
• Although the positive effect of benefits on employment duration does not
compensate fully for the negative effect on unemployment duration,
these results show that reforms proposals of the UI system should
consider both effects
30