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How Changes in Financial Incentives Affect the Duration of Unemployment

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  • van Ours, Jan C.
  • Zweimüller, Josef
  • Lalive, Rafael

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 behavioural responses of unemployed workers. Results indicate that costs due to behavioural responses are substantial.

Suggested Citation

  • van Ours, Jan C. & Zweimüller, Josef & Lalive, Rafael, 2005. "How Changes in Financial Incentives Affect the Duration of Unemployment," CEPR Discussion Papers 4986, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4986
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    More about this item

    Keywords

    Maximum benefit duration; Replacement rate; Unemployment duration; Unemployment insurance; Policy change;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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