The Design of Unemployment Transfers: Evidence from a Dynamic Structural Life-Cycle Model

42 Pages Posted: 3 Jul 2010

See all articles by Peter Haan

Peter Haan

DIW Berlin, German Institute for Economic Research; IZA Institute of Labor Economics

Victoria L. Prowse

Purdue University - Department of Economics; IZA Institute of Labor Economics; German Institute for Economic Research (DIW Berlin)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2010

Abstract

In this paper we use a dynamic structural life-cycle model to analyze the employment, fiscal and welfare effects induced by unemployment insurance. The model features a detailed specification of the tax and transfer system, including unemployment insurance benefits which depend on an individual's employment and earnings history. The model also captures the endogenous accumulation of experience which impacts on future wages, job arrivals and job separations. For better identification of the structural parameters we exploit a quasi-natural experiment, namely reductions over time in the entitlement period for unemployment insurance benefits which varied by age and experience. The results show that a policy cut in the generosity of unemployment insurance operationalized as a reduction in the entitlement period generates a larger increase in employment and yields a bigger fiscal saving than a cut operationalized as a reduction in the replacement ratio. Welfare analysis of revenue neutral tax and transfer reforms also favors a reduction in the entitlement period.

Keywords: Unemployment insurance, Replacement ratio, Entitlement period, Life-cycle labor supply, Tax reform, Method of Simulated Moments

JEL Classification: C23, C25, J22, J64

Suggested Citation

Haan, Peter and Prowse, Victoria L., The Design of Unemployment Transfers: Evidence from a Dynamic Structural Life-Cycle Model (March 2010). DIW Berlin Discussion Paper No. 986, Available at SSRN: https://ssrn.com/abstract=1633839 or http://dx.doi.org/10.2139/ssrn.1633839

Peter Haan (Contact Author)

DIW Berlin, German Institute for Economic Research ( email )

Mohrenstraße 58
Berlin, 10117
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Victoria L. Prowse

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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