On the extent of re-entitlement effects in unemployment compensation

Abstract

A dynamic labor matching economy is presented, in which the unemployed are either entitled to unemployment insurance (UI) or unemployment assistance (UA), and the employees are either eligible for UI or UA upon future separations. Eligibility for UI requires a minimum duration of contributions and UI benefits are then paid for a limited duration. Workers are risk-averse and wages are determined in a bilateral Nash bargain. As eligibility for UI does not automatically follow from employment, the two types of unemployed workers have different threat points, which delivers equilibrium wage dispersion. Most of the variables and parameters of the model are estimated using the French sample of the European Community Household Panel (1994)(1995)(1996)(1997)(1998)(1999)(2000). We show that extending the UI entitlement improves the situation of all groups of workers and slightly lowers unemployment, while raising UI benefits harms the unemployed on assistance and raises unemployment. Easier eligibility fo r UI also improves the situation of all groups of workers and favors relatively more the least well-off than longer entitlement. The re-entitlement effect in France lowers by 10% the rise in the wage and by 13% the rise in unemployment following a 10% increase in benefit levels.

Benefit reentitlement conditions in unemployment insurance schemes

“…hence, this formulation captures actual modes of financing via social contributions or taxes. 5 For notational reasons, we allow the instantaneous utility function of the unemployed to differ from that of the employed. However, our results will not hinge on this asymmetry, and in the numerical illustrations h (•) = g (•).…”

“…As explained further below we use the baseline calibration of Ortega & Rioux (2010) as well as their functional forms (where possible). The time period is a month.…”

“…Hopenhayn & Nicolini (2009) argue that if it is impossible to distinguish between quits and layoffs it is optimal to condition benefit eligibility on the employment history of unemployed. Ortega & Rioux (2010) emphasize that an employment criterion can support job creation since unemployed who have exhausted their benefits are willing to accept lower wages to regain the right to unemployment benefits. However, none of those studies allow for endogenous search.…”

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

“…In empirical work, the entitlement effect is not so easy to define or estimate. One of the very few works that tries to estimate this effect quantitatively is by Ortega and Rioux (2008).…”

“…They think that the conclusion drawn from search theory would be less negative if the theory was closer to the real world. In recent years, the search model has been developed and brought closer to reality -taking into account that the unemployed can receive unemployment insurance benefit as well as unemployment allowances, that unemployment benefit rates can change during the unemployment spell and that certain conditions must be met in order to be entitled to a benefit (for exampleOrtega and Rioux (2008),Coles and Masters (2006),Albrecht and Vroman (2005),Fredriksson and Holmlund (2001)). Above all, job search and matching equilibrium models have been used for these extensions.…”