How Changes in Financial Incentives Affect the Duration of Unemployment

43 Pages Posted: 3 Dec 2004

See all articles by Rafael Lalive

Rafael Lalive

University of Lausanne - Department of Economics (DEEP); IZA Institute of Labor Economics; 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

Josef Zweimüller

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2004

Abstract

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.

Keywords: maximum benefit duration, replacement rate, unemployment duration, unemployment insurance, policy change

JEL Classification: C41, J64, J65

Suggested Citation

Lalive, Rafael and van Ours, Jan C. and Zweimueller, Josef, How Changes in Financial Incentives Affect the Duration of Unemployment (November 2004). IZA Discussion Paper No. 1363; CESifo Working Paper Series No. 1337; IEW Working Paper Series No. 206. Available at SSRN: https://ssrn.com/abstract=609928

Rafael Lalive (Contact Author)

University of Lausanne - Department of Economics (DEEP) ( email )

BFSH1
Lausanne, 1015
Switzerland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Jan C. Van Ours

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2880 (Phone)
+31 13 466 3042 (Fax)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Josef Zweimueller

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland
+411 634 3724 (Phone)
+411 634 4907 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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