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On the spike in hazard rates at unemployment benefit expiration: The signalling hypothesis revisited

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  • Decreuse, Bruno
  • Kazbakova, Elvira

Abstract

We revisit the signalling hypothesis, whereby potential employers use the duration of unemployment as a signal as to the productivity of applicants. We suggest that the quality of such a signal is very low when the unemployed receive unemployment benefits: individuals have good reasons to remain unemployed. Conversely, the signal becomes much more efficient once benefits have elapsed: skilled workers should not stay unemployed in such cases. Therefore, the potential duration of unemployment benefits should drive employers' expectations and their recruitment practices. This mechanism can explain why hazards fall after benefit expiration, and why hazards respond more to the potential duration of benefits than to replacement rates.

Suggested Citation

  • Decreuse, Bruno & Kazbakova, Elvira, 2008. "On the spike in hazard rates at unemployment benefit expiration: The signalling hypothesis revisited," MPRA Paper 11223, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11223
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    File URL: https://mpra.ub.uni-muenchen.de/11223/1/MPRA_paper_11223.pdf
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    References listed on IDEAS

    as
    1. Ben-Horim, Moshe & Zuckerman, Dror, 1987. "The Effect of Unemployment Insurance on Unemployment Duration," Journal of Labor Economics, University of Chicago Press, vol. 5(3), pages 386-390, July.
    2. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
    3. Ham, John C & Rea, Samuel A, Jr, 1987. "Unemployment Insurance and Male Unemployment Duration in Canada," Journal of Labor Economics, University of Chicago Press, vol. 5(3), pages 325-353, July.
    4. Olivier Jean Blanchard & Peter Diamond, 1994. "Ranking, Unemployment Duration, and Wages," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 417-434.
    5. Coles, Melvyn & Masters, Adrian, 2000. "Retraining and long-term unemployment in a model of unlearning by not doing," European Economic Review, Elsevier, vol. 44(9), pages 1801-1822, October.
    6. Lynch, Lisa M, 1989. "The Youth Labor Market in the Eighties: Determinants of Re-employment Probabilities for Young Men and Women," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 37-45, February.
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    Cited by:

    1. de Groot, Nynke & van der Klaauw, Bas, 2019. "The effects of reducing the entitlement period to unemployment insurance benefits," Labour Economics, Elsevier, vol. 57(C), pages 195-208.

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    More about this item

    Keywords

    Worker heterogeneity; Signalling; Hazard rate; Unemployment compensation; Moral hazard;
    All these keywords.

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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