Journal Article

How Changes in Financial Incentives Affect the Duration of Unemployment

Rafael Lalive, Jan Van Ours and Josef Zweimüller

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 73, issue 4, pages 1009-1038
Published in print October 2006 | ISSN: 0034-6527
Published online October 2006 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1111/j.1467-937X.2006.00406.x
How Changes in Financial Incentives Affect the Duration of Unemployment

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  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Mobility, Unemployment, and Vacancies

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This paper studies how changes in the two key parameters of unemployment insurance—the benefit replacement rate (RR) and the potential benefit duration (PBD)—affect the duration of unemployment. To identify such an effect we exploit a policy change introduced in 1989 by the Austrian government, which affected various unemployed workers differently: a first group experienced an increase in RR; a second group experienced an extension of PBD; a third group experienced both a higher RR and a longer PBD; and a fourth group experienced no change in the policy parameters. We find that unemployed workers react to the disincentives by an increase in unemployment duration, and our empirical results are consistent with the predictions of job search theory. We use our parameter estimates to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system with unchanged behaviour and costs due to behavioural responses of unemployed workers. Our results indicate that costs due to behavioural responses are substantial.

Keywords: E24; J64; J65

Journal Article.  14743 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Mobility, Unemployment, and Vacancies

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