How Changes in Financial Incentives Affect the Duration of Unemployment

R. Lalive, J.C. van Ours, J. Zweimüller

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Abstract

This paper studies how changes in the two key parameters of unemployment insurance - the benefit replacement rate (RR) and the potential duration of benefits (PBD) - affect the duration of unemployment.In 1989, the Austrian government made unemployment insurance more generous by changing, simultaneously, the maximum duration of regular unemployment benefits and the earnings replacement ratio.We find that increasing the replacement ratio has much weaker disincentive effects than increasing the maximum duration of benefits.We use these results to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system and costs due to behavioral responses of unemployed workers.Results indicate that costs due to behavioral responses are substantial.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages43
Volume2004-86
Publication statusPublished - 2004

Publication series

NameCentER Discussion Paper
Volume2004-86

Keywords

  • incentives
  • unemployment
  • unemployment insurance
  • policy

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