The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden

72 Pages Posted: 4 Sep 2015

See all articles by Jonas Kolsrud

Jonas Kolsrud

Uppsala University

Camille Landais

London School of Economics & Political Science (LSE)

Peter Nilsson

IFAU - Institute for Labour Market Policy Evaluation; Uppsala University

Johannes Spinnewijn

London School of Economics & Political Science (LSE)

Abstract

This paper provides a simple, yet general framework to analyze the optimal time profile of benefits during the unemployment spell. We derive simple sufficient-statistics formulae capturing the insurance value and incentive costs of unemployment benefits paid at different times during the unemployment spell. Our general approach allows to revisit and evaluate in a transparent way the separate arguments for inclining or declining profiles put forward in the theoretical literature.We then estimate our sufficient statistics using administrative data on unemployment, income and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption determining the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. On average, savings and credit play a limited role in smoothing consumption. Our evidence therefore indicates that the recent change from a flat to a declining benefit profile in Sweden has decreased welfare. In fact, the local welfare gains push towards an increasing rather than decreasing benefit profile over the spell.

Keywords: unemployment, dynamic policy, sufficient statistics, consumption smoothing

JEL Classification: H20, J64

Suggested Citation

Kolsrud, Jonas and Landais, Camille and Nilsson, Peter and Spinnewijn, Johannes, The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden. IZA Discussion Paper No. 9185. Available at SSRN: https://ssrn.com/abstract=2655134

Jonas Kolsrud (Contact Author)

Uppsala University ( email )

Camille Landais

London School of Economics & Political Science (LSE) ( email )

Peter Nilsson

IFAU - Institute for Labour Market Policy Evaluation ( email )

Box 513
751 20 Uppsala
Sweden

Uppsala University

Box 513
Uppsala, 751 20
Sweden

Johannes Spinnewijn

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
00 44 (0) 20 7955 7022 (Phone)

HOME PAGE: http://econ.lse.ac.uk/staff/spinnewijn_johannes/

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