DP1521 Benefit Duration and Unemployment Entry: Quasi-experimental Evidence for Austria

Author(s): Rudolf Winter-Ebmer
Publication Date: December 1996
Keyword(s): Elderly Workers, Implicit Contracts, Unemployment Entry, Unemployment Insurance
JEL(s): J14, J41, J64, J65
Programme Areas: Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1521

This paper studies the impact of a selective extension of unemployment benefit duration on the incidence of unemployment in Austria. As the new law applies only to elderly workers in certain regions of the country after June 1988, a quasi-experimental situation is created. Unemployment entry is found to rise by between four and eleven percentage points due to the new law. The findings are explained by a breach of an implicit contract; elderly workers receive wages above their marginal product in order to elicit higher effort. Dismissal of elderly workers is now easier because more generous unemployment insurance makes reputation loss for the firm less severe.