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Identifying Unemployment Insurance Income Effects with a Quasi-Natural Experiment

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  • Mário Centeno
  • Álvaro A. Novo

Abstract

This paper acknowledges that UI has a non-distortionary income effect generated by easing the liquidity constraints of the unemployed. Using an exogenous increase in the entitlement period as a quasi-experimental setting, we find evidence of an important income effect. The extension of the entitlement period prolongs unemployment spells, but its effect is decreasing with the degree of liquidity constraints (indexed by wages quintiles). An exception to this pattern is the behavior of individuals in the first wages quintile. The fact that the most constrained individuals extend the least their unemployment spells conforms to the nonstationarity of the job search process. This result points to the possibility that the UI system may become regressive, benefiting significantly less those at the bottom of the wage distribution, who find it harder to benefit from extended UI entitlements.

Suggested Citation

  • Mário Centeno & Álvaro A. Novo, 2007. "Identifying Unemployment Insurance Income Effects with a Quasi-Natural Experiment," Working Papers w200710, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w200710
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp200710.pdf
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    References listed on IDEAS

    as
    1. Gerard J. van den Berg, 1990. "Nonstationarity in Job Search Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 255-277.
    2. van Ours, Jan C. & Vodopivec, Milan, 2004. "How Changes in Benefits Entitlement Affect Job-Finding: Lessons from the Slovenian "Experiment"," IZA Discussion Papers 1181, Institute of Labor Economics (IZA).
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Centeno, Luis & Centeno, Mário & Novo, Álvaro A., 2009. "Evaluating job-search programs for old and young individuals: Heterogeneous impact on unemployment duration," Labour Economics, Elsevier, vol. 16(1), pages 12-25, January.
    2. Trine Filges & Anders Bruun Jonassen & Anne‐Marie Klint Jørgensen, 2018. "Reducing unemployment benefit duration to increase job finding rates: a systematic review," Campbell Systematic Reviews, John Wiley & Sons, vol. 14(1), pages 1-194.
    3. Álvaro A. Novo & André C. Silva, 2017. "Can a search model predict the effects of an increase in the benefit duration? Evidence from the Portuguese unemployment insurance reform," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-14, December.
    4. Mário Centeno & Álvaro A. Novo, 2007. "The Regressivity of Unemployment Insurance: Identification of the Income Effect Through the July 1999 Legislation," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    5. Bernd Fitzenberger & Ralf A. Wilke, 2010. "New Insights into Unemployment Duration and Post Unemployment Earnings in Germany," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(6), pages 794-826, December.
    6. Mário Centeno & Álvaro Novo, 2009. "Reemployment wages and UI liquidity effect: a regression discontinuity approach," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 8(1), pages 45-52, April.

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    More about this item

    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
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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