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Changing the unemployment insurance duration: heterogeneous effects and an unbudging exit spike

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  • Korpela, Heikki

Abstract

I study the effects of the maximum duration of unemployment insurance benefits on unemployment. I find highly heterogeneous effects across two consecutive reforms in Finland. Both reforms cut the maximum duration by 20 weeks. The first reform targeted those with short work histories and did not affect their mean time in unemployment. The second reform applied to everyone and reduced the mean duration by three weeks. The first reform also did not move the spike in job-finding rates: it stayed at the old maximum duration. The second reform moved the spike to the new exhaustion point, also among the short-history group. This difference can be explained by the first reform's unique implementation, which separated the time when insurance ends from when individuals must switch benefits agencies. This switch causes observable frictions, which appear to be an essential driver for the observed spike. I present how the job-finding rates can be adjusted for observed frictions. Adjusting the job-finding rates for observed frictions substantially flattens the spike.

Suggested Citation

  • Korpela, Heikki, 2023. "Changing the unemployment insurance duration: heterogeneous effects and an unbudging exit spike," Working Papers 158, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:158
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    File URL: https://www.doria.fi/handle/10024/187918
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    References listed on IDEAS

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    1. Andreas I. Mueller & Johannes Spinnewijn & Giorgio Topa, 2021. "Job Seekers' Perceptions and Employment Prospects: Heterogeneity, Duration Dependence, and Bias," American Economic Review, American Economic Association, vol. 111(1), pages 324-363, January.
    2. Le Barbanchon, Thomas & Rathelot, Roland & Roulet, Alexandra, 2019. "Unemployment insurance and reservation wages: Evidence from administrative data," Journal of Public Economics, Elsevier, vol. 171(C), pages 1-17.
    3. Jan Boone & Jan Ours, 2012. "Why is There a Spike in the Job Finding Rate at Benefit Exhaustion?," De Economist, Springer, vol. 160(4), pages 413-438, December.
    4. Jan C. van Ours & Milan Vodopivec, 2006. "How Shortening the Potential Duration of Unemployment Benefits Affects the Duration of Unemployment: Evidence from a Natural Experiment," Journal of Labor Economics, University of Chicago Press, vol. 24(2), pages 351-378, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    unemployment insurance; unemployment duration; hazard rates; Labour markets and education; J64; J65; fi=Sosiaaliturva|sv=Social trygghet|en=Social security|; fi=Työmarkkinat|sv=Arbetsmarknad|en=Labour markets|;
    All these keywords.

    JEL classification:

    • 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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