oes an extension of the period for which unemployment benefit can be claimed affect the incidence of unemployment? Hitherto, studies of the incentive effects of social programmes using wage-benefit replacement ratios have proved problematic owing to endogenous effects. In Discussion Paper No. 1521, Rudolf Winter-Ebmer approaches this issue via a quasi-experimental situation where there are selective and exogenous changes to benefit duration.

In 1988, the period for which elderly people in Austria could claim unemployment benefits was extended from one to four years in certain regions. Subsequently, unemployment rates for elderly workers increased substantially. Winter-Ebmer suggests that this increase in unemployment was due to the breach of implict employment contracts in which workers are paid wages below their productivity at the beginning of their careers, and above their productivity at the end. Firms have an incentive to dismiss workers once their productivity is below the contractual wage. More generous unemployment compensation may reduce the reputation costs for firms of such dismissals. Winter-Ebmer suggests three tests that show this hypothesis to be preferable to the argument that increased benefits raise unemployment by reducing labour supply incentives and thereby increasing voluntary quits.

Benefit Duration and Unemployment Entry: Quasi-Experimental Evidence for Austria
Rudolf Winter-Ebmer