Disincentive effects of unemployment insurance benefits: maximum benefit duration versus benefit level

Abstract

This paper uses a unique dataset about unemployment benefit recipients and their exits to employment in Estonia to investigate the effects of benefits on unemployment duration. Both nonparametric and parametric estimations show that unemployment benefits have a strong and significant disincentive effect on hazard rates to exit into employment, just as search theory predicts. The effects of benefits are stronger and more homogeneous when the maximum duration of unemployment insurance benefit is longer. The unemployed eligible for shorter unemployment insurance benefits are influenced more by the size of benefits and changes in the benefit replacement rate. Also, both for the unemployed with shorter benefit periods and for the unemployed with longer benefit periods a rise in hazard rates occurs during the benefit period and a sharp drop straight after.

Back to Work: Growing with Jobs in Europe and Central Asia

“…Across OECD countries, the evidence shows that benefit generosity and duration have a positive impact on unemployment (Addison and Portugal 2008;Dlugosz, Stephan, and Wilke 2013;Flaig and Rottman 2011;Katz and Meyer 1990;Lo, Stephan, and Wilke 2012;Nickell 1998). Other studies, including for Estonia and Slovenia, also link unemployment benefits to disincentives for job search (Lauringson 2011;Van Ours and Tuit 2010;Van Ours and Vodopivec 2006). However, in Germany a recent study finds an impact on the length of unemployment but also reports that those with longer benefit duration are also able to find jobs at higher wages and longer tenure-possibly suggesting the role of unemployment benefits in allowing workers to find better matching jobs.…”

Minimum wages and the wage distribution in Estonia

“…The main institutional reforms in Estonia during our sample period were the introduction of an unemployment insurance system in 2002 and a major relaxation in employment protection legislation in 2009. The introduction of an unemployment insurance system increased replacement rates for separated workers and led to a lengthening of the tenure of unemployment (Lauringson, 2011). Reform of the employment legislation system also contributed to a reduction in job-to-job flows (Malk, 2014).…”

Matching Skills and Jobs in Estonia

“…Even though the generosity of unemployment benefits in Estonia is low and entitlement strict compared to other OECD countries (Venn, 2012;Vork, 2009, Chapter 2), there is evidence that benefits tend to increase the duration of OECD Average unemployment due to a disincentive effect and a longer job-search process (Lauringson, 2010. In response, the authorities scaled up activation measures aimed at bringing back jobless to the labour market from 0.05% in 2005 to 0.24% of GDP in 2010.…”