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

41 Pages Posted: 8 Mar 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

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. IZA Discussion Paper No. 4792, Available at SSRN: https://ssrn.com/abstract=1566341 or http://dx.doi.org/10.2139/ssrn.1566341

Peter Haan (Contact Author)

DIW Berlin, German Institute for Economic Research ( email )

Mohrenstra├če 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 )

Mohrenstra├če 58
Berlin, 10117
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
52
Abstract Views
1,068
Rank
319,617
PlumX Metrics