A basic result of search theory is that unemployed workers' reservation wages decline as benefit exhaustion is approached, increasing the probability of re-entering employment. Another common finding is that shorter benefit periods contribute to lower unemployment. These results may not necessarily carry over to countries such as Sweden, however, where labour market programmes are targeted at the long-term unemployed at risk of benefit exhaustion. In Discussion Paper No. 1200, Kenneth Carling, Per-Anders Edin, Anders Harkman, and Bertil Holmlund provide a comprehensive analysis of unemployment duration in Sweden by means of a large dataset on individual unemployment spells.

A standard search model is augmented to account for two institutional features of the Swedish unemployment insurance system to which the paper pays particular attention: the behaviour of job-finding rates when unemployed workers approach the date of benefit exhaustion; and the incentive effects of time-limited benefits when temporary public jobs are available as employment of last resort. Three exit paths and their transition rates from unemployment are examined: the transition to regular employment, for which an increase is found as benefit exhaustion is approached; the transition to temporary public jobs, where the respective increase is quite dramatic; and the transition to non-participation. By and large, the results indicate that the availability of programmes targeted at long-term benefit receivers does not eliminate the incentives to avoid benefit exhaustion through more aggressive search at the end of the benefit period.

Unemployment Duration, Unemployment Benefits, and Labour Market Programmes in Sweden
Kenneth Carling, Per-Anders Edin, Anders Harkman, and Bertil Holmlund

Discussion Paper No. 1200, June 1995 (HR)