Unemployment Traps: Do Financial Disincentives Matter?

37 Pages Posted: 23 Apr 2001 Last revised: 16 Apr 2023

See all articles by Peder J. Pedersen

Peder J. Pedersen

Department of Economics Aarhus University ; IZA Institute of Labor Economics

Nina Smith

Aarhus University - Department of Economics and Business Economics; IZA Institute of Labor Economics

Abstract

This paper analyses the importance of financial dis-incentives for workers in Denmark. Based on a panel survey which is merged to a number of administrative registers it is possible to calculate precise measures of the economic incentives for labour force participants between employment in a full time job and being on unemployment insurance benefits and considering also the fixed costs of work. The results indicate large dis-incentives effects for some groups, especially low paid women. In 1996, 6 per cent of Danish men and 13 per cent of the women had a lower disposable net income if working in a full-time job compared to being on unemployment benefits. The effect of these financial dis-incentives is analysed in simple reduced form models of on-the-job search, unemployed search behaviour, unemployment risk, and transitions out of the labour force. We find that the net compensation rate in unemployment has a significant impact on women’s propensity to leave the labour force, on measures of search intensity, on the risk of being hit by unemployment and on one of our flexibility measures, i.e. the maximum acceptable commuting time to a job. The net compensation rate has no impact on the willingness to move to another place to get a job. However, here we find a significant impact from job attitude related measures. We end the paper reporting the results from including attitude variables along with economic variables. We find a number of significant effects from attitude variables. However, the main conclusion is that economic incentives dominate the present analysis of unemployment traps.

Keywords: Unemployment traps, job attitudes, incentives

JEL Classification: I38, J32, J64

Suggested Citation

Pedersen, Peder J. and Smith, Nina, Unemployment Traps: Do Financial Disincentives Matter?. IZA Discussion Paper No. 274, Available at SSRN: https://ssrn.com/abstract=267210 or http://dx.doi.org/10.2139/ssrn.267210

Peder J. Pedersen (Contact Author)

Department of Economics Aarhus University ( email )

DK-8000 Aarhus
Denmark
+45 8942 1581 (Phone)
+45 8613 6334 (Fax)

IZA Institute of Labor Economics

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

Nina Smith

Aarhus University - Department of Economics and Business Economics ( email )

Universitetsparken
DK-8000 Aarhus C
Denmark
+45 8948 6413 (Phone)
+45 8615 5175 (Fax)

IZA Institute of Labor Economics

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

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