Unemployment Insurance in Europe: unemployment duration and subsequent employment stability

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Unemployment Insurance in Europe: unemployment duration and subsequent employment stability

EPUNet Conference

8-9 May 2006

Barcelona

Konstantinos Tatsiramos

IZA, Bonn

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• Unemployment is a major issue especially in Europe:– High unemployment rates – EU (9%), US (5.8%) (1990-2000)– High incidence of long-term unemployment – EU (40%), US (<10%)

• Unemployment has economic and social consequences (loss of skills, loss of income, poverty)

• EU “Lisbon Strategy” (2000):– achieve full employment by creating more and better jobs– attain higher geographic and occupational mobility– improve skills and information on job opportunities

• Policy recommendations stress the importance of structural reforms:– To make the labour market more flexible– Work more attractive– Develop human resources

Introduction

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Unemployment Insurance (UI)

• Supports the income of unemployed while searching for a new job

• Negative features of UI system:– exert lower search effort - higher reservation wages

– longer unemployment duration –> long-term unemployment

• Positive features of UI system– increase effectiveness of search activities – afford search costs

– increase efficiency of job matching – obtain the “right job”

– “Benefits allow the unemployed to search for a job which matches their abilities, rather than being forced by financial hardship into accepting the first available job offer “

Source: OECD Employment Outlook (1996)

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Motivation

• The negative features have dominated the literature and reform proposals, while little is known on the positive features of UI

• The empirical literature has focused on the effect of UI on the exit rate from unemployment emphasizing the disincentive effects of UI

• Studies on the effect of UI on post-unemployment outcomes have focused on re-employment wages, while subsequent employment duration has been neglected

• There is no empirical evidence for Europe

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• Is there an effect of benefits on post-unemployment employment stability?

• The focus is on employment duration as a measure of employment stability– Based on Jovanovic (1979) a good match lasts longer

– Akerlof, Rose and Yellen (1989) provide evidence that nonpecuniary match aspects reduce the quit probability

• Hypothesis: If UI has a post-unemployment beneficial effect then we expect higher employment stability for recipients

Empirical Question

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Preview of Results• Short run effect (on unemployment duration):

Benefits reduce the exit rate from unemployment

– Expected unemployment duration of recipients is higher than non-recipients

– This is in line with the conventional results both in the theoretical and empirical literature

• Long run effect (on employment duration): Benefits reduce the exit rate from subsequent employment

– Recipients remain employed on average 4 months longer, which represents a 20% increase relative to the average employment duration. This partly offsets the short run effect of benefits

– This effect is pronounced (a) in countries with relatively more generous benefits and (b) for recipients who have stayed for 6 months or more in unemployment

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Plan of Talk

• Theoretical Background

• Empirical Literature

• Data Description

• Econometric Methodology

• Empirical Results

• Conclusions

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Theoritical Framework (1)

• Convention: Benefits create disincentives

• Labor – Leisure model: Lower opportunity cost of leisure (benefits ‘’subsidise’’ leisure)

• Job Search models: Lower opportunity cost of unemployment Lower search effort Higher reservation wages

• Both models predict longer unemployment duration

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Theoritical Framework (2)

Other results: Benefits might improve post-unemployment outcomes

• Higher reservation wages lead to higher re-employment wages

• More efficient search leads to increased quality of job match

Benefits as a ‘’search subsidy’’ as they lower opportunity cost of search (Burdett, 1979)

Increased post-unemployment job stability as unemployed get the time to find the ‘’right job’’ reducing job mismatch (Marimon&Zilibotti, 1999)

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Empirical Literature

• UI leads to longer unemployment duration Atkinson&Micklewright (1991), Devin&Kiefer (1991)

• UI on post – unemployment wages Ehrenberg&Oaxaca (1976) – positive effect Addison&Blackburn (2000) – weak effect

• UI on job stability Belzil (2000) – positive but small effect (0.5-0.9 days of expected job

duration per additional week of benefits)

• Future entitlement of UI on Employment Duration Baker&Rea (1998) – increase employment hazard Jurajda (2002) – increase layoff hazard

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Data Description

• European Community Household Panel (1994 – 2001)60,500 nationally representative households, 130,000 individuals (16+) for the EU-15

• Countries considered in this study:

Belgium, Denmark, France, Germany, Greece, Italy, Ireland, Portugal, Spain, and UK

• Sample Strategy

Inflow sample of unemployed males, 18-60 years old

Construct individual labour market histories using the calendar of activities (monthly information)

Multiple spells

Consider exits out of labour force as continued unemployment spells

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BEL DK FR GER GR

# Un Spells 246 352 842 1150 971

Exit to Emp 170(69.11 %)

262(74.43 %)

569(67.58 %)

732(63.65 %)

759(78.17 %)

Exit Back to Unem

62(25.20 %)

92(26.14 %)

223(26.48 %)

314(27.30 %)

483(49.74 %)

IRE IT POR SP UK

# Un Spells 441 1364 640 2324 537

Exit to Emp 333(75.51 %)

1012(74.19 %)

446(69.69 %)

1776(76.42%)

422(78.58 %)

Exit to Unem

99(22.45%)

559(40.98 %)

172(26.88 %)

977(42.04%)

118(21.97 %)

Table 1. Transitions in the sample

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• Information on benefits in ECHP

1) Question on receipt of benefits at interview2 Question on amount of benefits received in previous year

Use both these variables to construct a benefit indicator and benefitsduration

• Benefit Indicator : I(b≥t) equals 1 if b≥t and 0, otherwise

• Benefit duration (B) Observed only if B<T. Otherwise B=T(Cannot estimate the effect of benefits as benefit termination getscloser)

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B1

P A A1

B

C

1994 Wave 1 1995 Wave 2 1996

Figure 1. Type of Spells

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Table 2. Summary Statistics

France Germany Italy Portugal Spain UK

B NB B NB B NB B NB B NB B NB

Number of Spells

479 363 758 392 280 1084 171 469 973 1351 187 350

Higher Education

.163 .235 .164 .163 .039 .045 .018 .026 .101 .142 .438 .480

Secondary Education

.447 .377 .580 .574 .257 .310 .122 .119 .141 .192 .102 .109

Less than Sec. Ed.

.390 .388 .256 .263 .704 .645 .860 .855 .758 .666 .460 .411

Age 34.6 32.4 39.0 36.7 39.4 33.7 40.2 33.8 37.5 32.6 36.5 34.9

Married .399 .369 .626 .559 .704 .433 .719 .458 .659 .391 .481 .460

Number of Kids

.852 .758 .767 .719 .936 .567 .848 .857 .906 .662 .936 .869

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Employment/Contributions conditions

Replacement Rate(% of previous gross earnings)

Duration

Belgium 312 days in 18 months to 624 days in last 3 years, depending on age

60 No limit

Denmark 52 weeks in 3 years 90 1+3 years

France 4 months in 8 months 75 4-60 (A)

Germany 12 months in 3 years 60 12-64 (A+C)

Greece 125 in 14 months 40 5-12 (C)

Italy 52 weeks in 2 years 30 180 days

Ireland 39 weeks in 1 year Flat Rate 390 days

Portugal 540 days in 2 years 65 12-30 (A)

Spain 12 months in 6 years 70 4-24 (C)

United Kingdom 2 years Flat Rate 182 days

Source: European Commission Missoc 1994. (A) denotes that duration depends on age, (C) on contributions

Table 3. Characteristics of the Unemployment Insurance System

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Empirical Survival Functions by Benefits (Proportion Remaining Unemployed)

0.000

0.200

0.400

0.600

0.800

1.000

BEL DEN FR GER GRE IRE IT POR SP UK

1

6

12

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Empirical Survival Functions by Benefits (Proportion Remaining Employed)

0.000

0.200

0.400

0.600

0.800

1.000


1

6

12

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Empirical Survival Functions by Benefits (Proportion Remaining Employed for Previous Unempl > 6 months)

0.000

0.200

0.400

0.600

0.800

1.000


1

6

12

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• Two-state duration model– Hazard rate: the probability to exit a state at a certain point in

time having being in that state up to that moment– States

• Unemployment• Subsequent employment

• Identification Assumption:Following (Arellano, Bover, Bentolila, 2002), we assume a two regime model Effect of benefits on hazard is independent of remaining benefit duration

• Econometric Issues:– Unobserved Heterogeneity– Endogeneity of Benefit Indicator

Econometric Methodology

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Multispell Mixed Proportional Hazard Model with flexible baseline hazard

dependenceduration individual captureswhich

hazard baseline therepresents )( termThe

(3)

for and

(2) )(

for while,, where

(1) ) ()exp()()|(

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follows as benefitsfor process logistic a

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• Estimations performed by country:

– Unem. and Empl. separately without UH

– Unem. and Empl. separately with UH

– Unem. and Empl. jointly with correlated UH

• Unemployment Specification (with Benefit Selection)– Dummy for receiving benefits

• Employment specification:– Dummy for having received benefits during previous unemployment

spellor– Dummy for having received benefits interacted with previous

Unemployment Duration

– Other controls:• education, age, married, spouse’s labor market status, number of kids, year

dummies, regional unemployment rate

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Results – Without Unobserved Heterogeneity

BEL DEN FR GER GR IREL IT POR SP UK


Benefits -.432

(.185)

-.412

(.143)

-.396

(.088)

-.669

(.083)

.050

(.083)

-.510

(.128)

.280

(.079)

-.835

(.126)

-.234

(.052)

-.344

(.106)

Employment Duration

Benefits -.329

(.241)

-.054

(.228)

-.039

(.102)

-.048

(.095)

.100

(.072)

-.061

(.193)

.115

(.073)

.077

(.195)

.017

(.048)

.034

(.166)

Other Controls: education, age, married, spouse’s labor market status, number of kids, year dummies, regional unemployment rate

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Results – With Unobserved Heterogeneity



Benefits -.460

(.225)

-.412

(.143)

-.396

(.088)

-.736

(.113)

-.234*

(.141)

-.561

(.199)

-.207*

(.125)

-1.204

(.163)

-.460

(.075)

-.345

(.143)

Employment Duration

Benefits -1.832

(.310)

-.414*

(.222)

-.232*

(.139)

-.193*

(.115)

-.028

(.109)

.034

(.194)

-.036

(.095)

.339

(.228)

-.052

(.062)

-.469

(.175)


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Results – With Unobserved Heterogeneity (JOINT)



Benefits -.492

(.193)

-.446

(.147)

-.389

(.091)

-.742

(.095)

-.187

(.142)

-.525

(.199)

-.207*

(.125)

-1.031

(.176)

-.358

(.067)

-.344

(.111)

Employment Duration

Benefits -1.539

(.284)

-.663

(.232)

-.352

(.222)

-.376

(.115)

-.148

(.125)

-.065

(.207)

-.404

(.101)

.256

(.215)

-.422

(.064)

-.364

(.177)


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Employment Duration: with UH and interactions (JOINT)


Benefits

Benefits

*Un Dur

(1-6)

Benefits

*Un Dur

(7-12)

-2.084

(.829)

1.146

(.814)

.145

(.880)

-.284

(.720)

-.377

(.767)

-.693

(1.01)

-.583

(.252)

.168

(.307)

.741*

(.429)

-.223

(.312)

.014

(.321)

-1.232

(.399)

-.084

(.289)

-.094

(.276)

.081

(.336)

-.335

(.446)

.221

(.519)

1.235*

(.642)

.289

(.275)

-.811

(.276)

-.514*

(.307)

-.003

(.654)

.538

(.664)

.043

(.748)

-.441

(.162)

-.018

(.173)

.122

(.191)

-.427

(.292)

.326

(.356)

-.573

.602


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Conclusions

• We analyse empirically the effect of UI on unemployment and employment duration in a number of European countries

• Results show that benefits:– Reduce the exit rate from unemployment– Reduce also the exit rate from subsequent employment

• The effect is pronounced in countries with relatively more generous beneftis

and • For recipients who have stayed unemployed for 6 months or more

• Although the positive effect of benefits on employment duration does not compensate fully for the negative effect on unemployment duration, these results show that reforms proposals of the UI system should consider both effects

Unemployment Insurance in Europe: unemployment duration and subsequent employment stability

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