One effect of the transition of formerly planned economies to a market system has been an increase in unemployment. This in turn has led to moves to implement a system of unemployment benefits. In Discussion Paper No. 1118, John Micklewright and Gyula Nagy investigate whether the benefit system introduced in the case of Hungary is too generous, and whether it creates a serious disincentive for the unemployed to find work.

Entitlement periods to unemployment insurance were cut substantially at the start of 1993, and using non-parametric methods, the paper compares the outflow rate from claims beginning in January 1993 with those beginning in December 1992, a total sample size of 80,000 claims. Differences in job exit hazards between the December and January samples are found for some work history groups, but there are no sharp rises in the hazards before expiry of unemployment insurance entitlement. Hazards of exits to labour market programmes do rise just before insurance expiry. The results suggest that the unemployed in Hungary have fairly inelastic responses to changes in unemployment insurance benefits. This is not entirely surprising since the main explanation for unemployment in Hungary, as elsewhere in Central and Eastern Europe, has been the sharp reduction in output.

Unemployment Insurance and Incentives in Hungary
John Micklewright and Gyula Nagy

Discussion Paper No. 1118, January 1995 (HR)