The Effects of Extended Unemployment Insurance over the Business Cycle: Evidence from Regression Discontinuity Estimates Over Twenty Years

Abstract

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How quickly does structural reform pay off? An empirical analysis of the short-term effects of unemployment benefit reform

“…While the baseline analysis suggests that on average positive effects of this reform materialise quite rapidly, interacting the reform shock variable with the unemployment gap suggests that short-term gains are stronger during "good" times, and weaker -and in some cases even negative -during "bad" times. This finding is consistent with some micro-econometric evidence (Bover et al 2002;Schmieder et al 2012) which points to smaller disincentive effects from unemployment benefits -and therefore to smaller potential job search intensity and employment gains from benefit reform -in weak economic conditions. Taken at face value, the estimates imply that a median reduction Figure 1 Change in aggregate employment following a reduction in the initial unemployment benefit replacement rate.…”

Nordic Economic Policy Review

“…2 A few exceptions are Moffitt (1985), Arulampalam and Stewart (1995), Jurajda and Tannery (2003), Røed and Zhang (2005) and Schmeider et al (2010). The first three of these studies find that benefits distort incentives less in a downturn, whereas the study by Røed and Zhang (2005) does not find any differences in the effect of benefits on incentives across the business cycle.…”

“…The first three of these studies find that benefits distort incentives less in a downturn, whereas the study by Røed and Zhang (2005) does not find any differences in the effect of benefits on incentives across the business cycle. The same is true for Schmeider et al (2010). Disentangling possible business cycle dependencies in the incentive effects is very difficult, and the main empirical challenge is to find exogenous changes in UI benefits that are uncorrelated with the job finding rate not only at one point in time, but across the business cycle.…”

Active social insurance

“…Findings for Norway, based on the relatively limited labor market fluctuations experienced in this country, indicate that the disincentive effect of the UI level on the transition rate to employment is close to non-cyclical (Røed andZhang, 2003, 2005). Recent findings for Germany also indicate that the disincentive effect of UI duration is close to being non-cyclical, perhaps with a small (but not statistically significant) indication of pro-cyclicality (Schmieder et al 2012).…”