Journal Article

Unemployment compensation and high European unemployment: a reassessment with new benefit indicators

David R. Howell and Miriam Rehm

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 25, issue 1, pages 60-93
Published in print January 2009 | ISSN: 0266-903X
Published online January 2009 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grp010
Unemployment compensation and high European unemployment: a reassessment with new benefit indicators

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  • Economic Development and Growth
  • Public Economics
  • Political Economy
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Generous unemployment benefits lie at the heart of the conventional explanation for persistent high unemployment. The effects of benefit generosity on work incentives are more ambiguous in a broader behavioural framework in which workers get substantial disutility from unemployment (given income) and know that unemployment has scarring effects in the future. The micro evidence suggests modest effects of changes in generosity, but there are reasons to doubt that the impacts on national unemployment rates are consequential. The empirical case for the orthodox prediction comes from cross-country regressions on the OECD's gross replacement rate (GRR), but the published evidence is mixed, and we find little support in the pattern of annual changes in the GRR and the unemployment rate for OECD countries over the last three decades. We take advantage of new and much improved net replacement indicators from the OECD, which show little correlation with either the GRRs or with unemployment and employment rates. We conclude that the available evidence does not offer compelling support for the conventional view.

Keywords: unemployment; unemployment insurance; gross replacement rate; E24; J01; J21; J64; O57

Journal Article.  12716 words.  Illustrated.

Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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