Killing Them with Kindness: Negative Distributional Externalities of Increasing UI Benefits

19 Pages Posted: 22 Oct 2009  

John P. Haisken-DeNew

University of Melbourne - Melbourne Institute of Applied Economic and Social Research; McMaster University, Faculty of Social Sciences, Department of Economics

Matthias Vorell

Rhine-Westphalia Institute for Economic Research (RWI-Essen)

Date Written: July 1, 2009

Abstract

Of the many labour market Hartz IV reforms that have been implemented in Germany since 2005, the role of short-term unemployment insurance has not received much attention. In this paper we examine distributional effects of labour earnings and unemployment benefits using simulated increases in unemployment insurance replacement rates or equivalently, increases in the net present value of benefit duration. Starting around an 18%-point increase in the replacement rate, there are significant negative labour supply effects, drawing those employed into unemployment shifting the mass of the earnings distribution to the left. At around a 25%-point increase in the replacement rate, the mass of the distribution shifts right again, as those receiving unemployment benefits simply enjoy an increased transfer. Thus, due to the substantial negative labour supply effects, German economic policy should avoid potentially increasing the UI benefit replacement rate (or equivalently, increasing the benefit duration) in the near future as a response to the worldwide economic crisis.

Keywords: Unemployment, income distribution, labour supply

JEL Classification: J65, D31, J22

Suggested Citation

Haisken-DeNew, John P. and Vorell, Matthias, Killing Them with Kindness: Negative Distributional Externalities of Increasing UI Benefits (July 1, 2009). Ruhr Economic Paper No. 121. Available at SSRN: https://ssrn.com/abstract=1491550 or http://dx.doi.org/10.2139/ssrn.1491550

John P. Haisken-DeNew (Contact Author)

University of Melbourne - Melbourne Institute of Applied Economic and Social Research

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

McMaster University, Faculty of Social Sciences, Department of Economics ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Matthias Vorell

Rhine-Westphalia Institute for Economic Research (RWI-Essen) ( email )

Hohenzollernstr. 1-3
Essen, 45128
Germany

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