Unemployment Insurance and Duration of Unemployment: Evidence from Slovenia's Transition

Abstract

Would shortening the duration of unemployment benefits shorten the period of unemployment? In Slovenia, and probably in other transition economies with generous benefits, the answer is yes. Why not consider converting unemployment benefits into hiring subsidies?

Between 1990 and 1992 in Slovenia, recipients of unemployment insurance (UI) benefits tended to remain (formally) unemployed until their benefits expired, before taking a job. Institutional set-up suggests, and labor surveys show, that many of the recipients were actually working while collecting UI benefits. In the spirit, if not in the letter of the law, the UI system was abused.

Vodopivec shows that the escape rate of the recipients of unemployment compensation to employment increased dramatically just before the potential exhaustion of unemployment benefits - and decreased equally dramatically after benefits were exhausted. When grouped by the potential duration of benefits, unemployment length varies significantly. The unemployed with longer potential benefits stay unemployed longer. Because these groups differ in their characteristics (for example, in age), this does not prove the waiting behavior of the recipients. However, exits to employment dramatically increase just before exhaustion - and that does prove waiting behavior. The pattern of an increased escape rate just before benefits are exhausted and its dramatic fall thereafter is more rigorously demonstrated using hazard model estimation.

Possibilities for informal employment are abundant in Slovenia, and the environment of transition economies generally seems conducive to misuse of the UI system. Legislative loopholes and failure to enforce the labor code allowed the unemployed to work and to collect benefits. And the monitoring of job searches was lax.

Vodopivec's calculations suggest that reducing the duration of benefits would reduce the incidence of unemployment, its duration, the amount spent on UI benefits, and the inefficiencies generated by raising taxes to finance unemployment insurance. At the same time, reducing the duration of benefits would not impair job matches or crowd out jobs for nonrecipients.

True, despite increased efficiency generally, the workers with the least job mobility might suffer hardships - and might need social assistance.

The tradeoff between increased hardships for the least mobile group and greater efficiency generally would have to be resolved in the political sphere. Redesigning the system for better targeting would be less controversial. One way to reduce UI spending without seriously curtailing incentives to work would be to reduce the benefits in proportion to earnings from irregular work. Another possibility is stricter monitoring of the job searches of the unemployed. To reduce spending and make double dipping less attractive, old-age insurance could be removed from the package of benefits the UI system offers. And counselors who help the unemployed find jobs (and who may thus develop a close relationship with them) should perhaps not be expected to be able to make impartial decisions about disqualification for benefits; someone else should do that.

In addition to better targeting, a benefit transfer program - a voluntary program that converts UI benefits (through vouchers) into hiring subsidies - seems particularly attractive for Slovenia and other transition economies. In a way, such a program would legalize the double-dipping that has been taking place in Slovenia and possibly elsewhere. It would legalize practices that have undermined the system`s credibility. But it might improve fiscal savings while sustaining the incentive to find jobs.

This paper - a product of the Transition Economics Division, Policy Research Department - is part of a larger effort in the department to investigate labor markets in transitional economies. The study was funded by the Bank's Research Support Budget under the research project Labor Market Dynamics during the Transition of a Socialist Economy (RPO 677-20).