DP4986 How Changes in Financial Incentives Affect the Duration of Unemployment

Author(s): Rafael Lalive, Jan C. van Ours, Josef Zweimüller
Publication Date: April 2005
Keyword(s): maximum benefit duration, policy change, replacement rate, unemployment duration, unemployment insurance
JEL(s): C41, J64, J65
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4986

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 behavioural responses of unemployed workers. Results indicate that costs due to behavioural responses are substantial.