Welfare Benefits and Unemployment in Affluent Democracies: The Moderating Role of the Institutional Insider/Outsider Divide

Abstract

The effect of generous welfare benefits on unemployment is highly contested. The dominant perspective contends that benefits provide disincentive to work, whereas others portray benefits as job-search subsidies that facilitate better job matches. Despite many studies of welfare benefits and unemployment, the literature has neglected how this relationship might vary across institutional contexts. This article investigates how unemployment benefits and minimum income benefits affect unemployment across levels of the institutional insider/outsider divide. I analyze the moderating role of the disparity in employment protection for holders of permanent and temporary contracts and of the configuration of wage bargaining. The analysis combines data from 20 European countries and the United States using the European Union Labour Force Survey and the Current Population Survey 1992-2009. I use a pseudo-panel approach, including fixed effects for sociodemographic groups within countries and interactions between benefits and institutions. The results indicate that unemployment benefits and minimum income benefits successfully subsidize job search and reduce unemployment in labor markets with a moderate institutional insider/outsider divide. However, when there is greater disparity in employment protection and when bargaining either combines low unionization with high centralization or high unionization with low centralization, generous benefits create a disincentive to work, plausibly because attractive job opportunities are scarce. Keywords unemployment, welfare state, labor market institutions, institutional interactions, quantitative methods 2In 2008, U.S. policymakers extended the maximum duration of unemployment benefits from a 26-week limit to 73 weeks (with some variation across states) to ameliorate the effects of the dramatic increase in unemployment during the economic crisis. This more generous approach to benefits was short-lived, however, as the temporary Emergency Unemployment Compensation program expired at the end of 2013. The basic argument for not further extending benefits was, as U.S. Senator Jon Kyl put it in 2010, that generous unemployment insurance "doesn't create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work" (156 Congressional Record:845). Regarding Senator Kyl's point, Card and colleagues (2015) argued that although the duration of unemployment spells generally increases with benefit levels, this relationship was particularly strong during the crisis. Indeed, many scholars argue that generous and long-running welfare benefits act as a disincentive to work and thus increase unemployment (e.g., Lalive 2007; Layard, Nickell, and Jackman 2005;Meyer 1990;Nickell 1997; for a recent overview see Schmieder and von Waechter 2016). The notion of a disincentive effect has found its way into influential policy recommendations (OECD 1994(OECD , 2006 and has been used to justify welfare state retrenchment in a number of ...

National Family Policies and Mothers’ Employment: How Earnings Inequality Shapes Policy Effects across and within Countries

“…To include the United States, we used microdata from the Annual Social and Economic (ASEC) Supplement (Annual Demographic File prior to 2003) of the Current Population Survey (CPS) provided via the IPUMS-CPS database (Flood et al 2018). Given that we were interested in a limited set of basic measures, the EU-LFS is comparable to the CPS and the two can be used together, as shown in recent studies (e.g., Biegert 2017; Hipp and Leuze 2015).…”

A Stalled Revolution? Change in Women's Labor Force Participation during Child‐Rearing Years, Europe and the United States 1996–2016

“…2018). Given our interest in a limited set of basic measures, the EU‐LFS is comparable to the CPS as shown in recent studies (e.g., Biegert 2017; Hipp and Leuze 2015). The EU‐LFS is collected by each county's national statistical agency and provided to Eurostat.…”

Automation and occupational wage trends

“…This is perhaps due to an extensive focus on a single country (the United StatesU), or perhaps due to a greater focus on the employment effects of technological change. Regardless of cause, the relegation of institutions is surprising given the rich history of literature on their role in shaping the wage distribution within and between occupations (Biegert 2017, Brady 2009, Katz and Autor 1999, OECD 2011, Western and Rosenfeld 2011. We might plausibly expect that countries and industries with higher levels of unionisation, or those with standards on wage structures built into collective bargaining agreements, will experience different trends in occupational wage growth despite declining demand for routine tasks.…”