Can unemployment benefit cuts improve employment and earnings?
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Can unemployment benefit cuts improve employment and earnings? Lionel Cottier1 · Kathrin Degen2 · Rafael Lalive1 Received: 15 September 2016 / Accepted: 12 February 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract We study how a reduction in potential benefit duration (PBD) affects employment and earnings of job seekers before and after unemployment benefits exhaust. Reducing PBD induces job seekers to become less selective and accept jobs earlier, which can worsen or improve labor market outcomes. We study a 2003 reform that reduces PBD from 24 to 18 months for job seekers younger than 55 years in Switzerland. Using older job seekers as a control group, we find that reducing PBD increases employment and earnings even after unemployment benefits have run out. Employment and earnings increase particularly strongly for job seekers who previously worked in industries with high R&D expenditures, industries where job seekers’ skills can depreciate rapidly. Keywords Potential benefit duration · Unemployment duration · Older workers · Earnings and employment JEL Classification J64 · J65 · J38
We would like to thank the editor, two anonymous referees, and Pierre Cahuc, Thierry Mayer, Michele Pellizzari, Andrea Weber, Josef Zweimüller, and seminar audiences in Mannheim, Lech, Lausanne and Zurich for comments. Romain Mayer provided excellent research assistance, and Jonathan Gast (SECO) and David Sanchez (CCO) helped us in the interpretation of the data. This paper was supported by the NCCR LIVES and the State Secretariat for Economic Affairs (SECO). Rafael Lalive is also associated with CESifo, IFAU, IfW and University of Zurich (IEW). This paper was written when Kathrin Degen was at University of Lausanne. The views and opinions expressed in this paper are solely those of the authors and do not necessarily reflect the position of AMOSA.
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Rafael Lalive [email protected]
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Department of Economics, University of Lausanne, 1015 Lausanne-Dorigny, Switzerland
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AMOSA Labor Market Observatory, 8009 Zürich, Switzerland
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1 Introduction A key parameter of unemployment insurance is the potential duration of unemployment benefits (PBD). We assess how PBD affect earnings and employment of job seekers, an effect that could go both ways. Consider a job search setting where unemployment benefits exhaust but everything else remains the same as the spell lengthens. Job seekers choose a high reservation wage initially but it decreases rapidly as they approach benefit exhaustion (van den Berg 1990). Shortening PBD forces job seekers to lower their reservation wage throughout the entire spell (Mortensen 1977; van den Berg 1990). If job search duration was unaffected, lower reservation wages would imply worse job matches. But job seekers leave unemployment earlier, during a time when their reservation wage is still high. Shortening PBD can therefore decrease or increase job match quality.1 Suppose that employment opportunities worsen over time, e.g., in the form of a reduced flow o
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