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Title: The Optimal Timing of UI Benefits: Theory and Evidence from Sweden

Author(s): Jonas Kolsrud, Camille Landais, Peter Nilsson and Johannes Spinnewijn

Publication Date: July 2015

Keyword(s): consumption smoothing, dynamic policy, sufficient statistics and unemployment

Programme Area(s): Labour Economics and Public Economics

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 indicate 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.

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Bibliographic Reference

Kolsrud, J, Landais, C, Nilsson, P and Spinnewijn, J. 2015. 'The Optimal Timing of UI Benefits: Theory and Evidence from Sweden'. London, Centre for Economic Policy Research. http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10701