How Changes in Financial Incentives Affect the Duration of Unemployment
University of Lausanne - Department of Economics (DEEP); Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Jan C. Van Ours
Tilburg University - Department of Economics; University of Melbourne - Department of Economics
University of Zurich - Department of Economics Library; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 1363; CESifo Working Paper Series No. 1337; IEW Working Paper Series No. 206
This paper studies how changes in the two key parameters of unemployment insurance - the benefit replacement rate (RR) and the potential duration of benefits (PBD) - affect the duration of unemployment. In 1989, the Austrian government made unemployment insurance more generous by changing, simultaneously, the maximum duration of regular unemployment benefits and the earnings replacement ratio. We find that increasing the replacement ratio has much weaker disincentive effects than increasing the maximum duration of benefits. We use these results to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system and costs due to behavioral responses of unemployed workers. Results indicate that costs due to behavioral responses are substantial.
Number of Pages in PDF File: 43
Keywords: maximum benefit duration, replacement rate, unemployment duration, unemployment insurance, policy change
JEL Classification: C41, J64, J65working papers series
Date posted: December 3, 2004
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