UNEMPLOYMENT INSURANCE IN EUROPE: UNEMPLOYMENT DURATION AND SUBSEQUENT EMPLOYMENT STABILITY

This paper provides evidence on the effect of unemployment insurance on unemployment and subsequent employment duration in Europe using individual data from the European Community Household Panel. Country‐specific estimates based on a multivariate discrete‐time duration model, which takes into account dynamic selection issues and the endogeneity of benefit receipt, suggest that although receiving benefits has an adverse effect in the sense of increasing unemployment duration, there is also a positive effect associated with the increased duration of subsequent employment. This beneficial effect of unemployment insurance on employment stability is pronounced in countries with relatively generous benefit systems, and for recipients who have remained unemployed for at least six months. These findings are in line with theories that suggest a matching effect of unemployment insurance. (JEL: J64, J65, C41)     

THE JOINT DESIGN OF UNEMPLOYMENT INSURANCE AND EMPLOYMENT PROTECTION: A FIRST PASS

Unemployment insurance and employment protection are typically discussed and studied in isolation. In this paper, we argue that they are tightly linked, and we focus on their joint optimal design in a simple model, with risk‐averse workers, risk‐neutral firms, and random shocks to productivity. We show that, in the “first best,”unemployment insurance comes with employment protection—in the form of layoff taxes; indeed, optimality requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations from first best: limits on insurance, limits on layoff taxes, ex post wage bargaining, and ex ante heterogeneity of firms or workers. We show how the design must be modified in each case. Finally, we draw out the implications of our analysis for current policy debates and reform proposals, from the financing of unemployment insurance, to the respective roles of severance payments and unemployment benefits.     

CRIME AND UNEMPLOYMENT IN TURBULENT TIMES

We use the exceptional variation in municipality‐level unemployment in Sweden during the 1990s to identify the effect of unemployment on crime. Our findings are as follows: (i) There is a statistically and economically significant effect of general unemployment on the incidence of burglary, auto theft, and drug possession; (ii) we find no evidence for the popular view that youth unemployment matters for crime; (iii) prime‐aged unemployment is robustly correlated with main categories of youthful crimes, a finding consistent with the idea that unstable life conditions of parents have adverse spillover effects on the life‐choices of their children. (JEL: J00, K4)     

YOUTH UNEMPLOYMENT AND CRIME IN FRANCE

In this paper we examine the influence of unemployment on property crimes and on violent crimes in France for the period 1990 to 2000. This analysis is the first extensive study for this country. We construct a regional‐level data set (for the 95 départements of metropolitan France) with measures of crimes as reported to the Ministry of Interior. To assess social conditions prevailing in the département in that year, we construct measures of the share of unemployed as well as other social, economic, and demographic variables using multiple waves of the French Labor Survey. We estimate a classic Becker‐type model in which unemployment is a measure of how potential criminals fare in the legitimate job market. First, our estimates show that in the cross‐section dimension, crime and unemployment are positively associated. Second, we find that increases in youth unemployment induce increases in crime. Using the predicted industrial structure to instrument unemployment, we show that this effect is causal for burglaries, thefts, and drug offenses. To combat crime, it appears thus that all strategies designed to combat youth unemployment should be examined. (JEL: J19, K42, J64, J65)     

A POLITICAL ECONOMY THEORY OF FISCAL POLICY AND UNEMPLOYMENT

This paper presents a political economy theory of fiscal policy and unemployment. The underlying economy is one in which unemployment can arise but can be mitigated by tax cuts and increases in public production. Such policies are fiscally costly, but can be financed by issuing government debt. Policy decisions are made by a legislature consisting of representatives from different political districts. With the available policies, it is possible for the government to completely eliminate unemployment in the long run. However, with political decision making, the economy always has unemployment. Unemployment is higher when the private sector experiences negative shocks. When these shocks occur, the government employs debt‐financed fiscal stimulus plans which involve both tax cuts and public production increases. When the private sector is healthy, the government contracts debt until it reaches a floor level. Unemployment levels are weakly increasing in the economy's debt level, strictly so when the private sector experiences negative shocks. Conditional on the level of workers employed, the mix of public and private output is distorted.     

TURBULENCE AND UNEMPLOYMENT IN A JOB MATCHING MODEL

According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse new jobs due to high unemployment benefits. In this paper we reassess the turbulence‐unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers. (JEL: E24, J64)     

TECHNOLOGY ADOPTION,TURBULENCE, AND THE DYNAMICS OF UNEMPLOYMENT

Starting in the late 1970s, European unemployment began to increase while US unemployment remained constant. At the same time, capital‐embodied technical change began to accelerate, and the United States adopted the new capital much faster than Europe. I argue that these two facts are related. The main idea is that if there is capital‐embodied technical change, then the unemployment rate depends critically on how obsolete the installed capital stock is compared to the frontier. In particular, European workers initially worked with relatively obsolete capital, and so they lacked the skills required to work with frontier capital. When they lost their jobs they therefore stayed unemployed for longer than their American counterparts. I find that this channel accounts for about 70% of the discrepancy between the behavior of unemployment rates in Europe and the United States.     

The Effect of Unemployment Insurance Generosity on Unemployment Duration and Labor Market Transitions

This paper examines the impact of unemployment insurance (UI) benefit generosity on labor market transitions in Turkey from 2002 to 2012. Using a unique administrative dataset, I take advantage of a sharp discontinuity in treatment assignment at 900‐paid‐premium‐days to identify the impact of generosity on the outcome variables. I find that unemployment benefit duration is increased by approximately 0.07 weeks per additional week of UI. However, more generous benefits lead to lower probabilities of transition to employment and the impact is greater compared to developed countries. In addition, workers who are entitled to longer UI periods have lower probabilities of cheating the system and rejecting the services of the Turkish Employment Agency.     

PRODUCT MARKET REGULATION,FIRM SELECTION,AND UNEMPLOYMENT

This paper analyzes the effect of product market regulation (PMR) on unemployment in a search model with heterogeneous multiple‐worker firms. In our setup, PMR modifies the distribution of firm productivities, thereby affecting the equilibrium rate of unemployment. We distinguish between PMR related to entry costs and PMR that generates recurrent fixed costs. We find that: (i) higher entry costs raise the rate of unemployment mainly through our novel selection effect, (ii) higher fixed costs decrease unemployment through the selection effect and increase it through the competition effect analyzed in Blanchard and Giavazzi (2003, Quarterly Journal of Economics, 118, 879–907). Firm heterogeneity magnifies the impact of both types of regulatory costs. We propose econometric evidence consistent with the unemployment effects of sunk versus recurring costs.     

EQUILIBRIUM SEARCH UNEMPLOYMENT,ENDOGENOUS PARTICIPATION,AND LABOR MARKET FLOWS

The sustainability of welfare states requires high employment and high participation to raise the tax base. To analyze labor supply in a world with market frictions, we propose and solve a macro model of the labor market with unemployment and labor force participation as endogenous and distinct states. In our world, workers' decisions of participating are determined by an entry decision and an exit decision. A calibration of the model improves the usual representations of labor markets, since it quantitatively accounts for the observed flows between employment and nonparticipation. The paper investigates also the effect of payroll taxes and unemployment benefits on participation decisions. Taxes reduce entries and increase exits, whereas unemployment benefits, at a given job‐finding rate, raise entries and have ambiguous effects on exits. (JEL: J2, J6)     

PAYROLL TAXES,SOCIAL INSURANCE,AND BUSINESS CYCLES

Payroll taxes represent a major distortionary influence of governments on labor markets. This paper examines the role of time‐varying payroll taxes and the social safety net for cyclical fluctuations in a nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search effort. A balanced social insurance budget induces countercyclical payroll taxation, renders gross wages more rigid over the cycle and strengthens the model's endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve and countercyclical unemployment as well as substantial volatility and persistence of vacancies and unemployment.     

UNEMPLOYMENT INSURANCE IN WELFARE STATES: THE IMPACTS OF SOFT DURATION CONSTRAINTS

Abstract Based on a major reform of Norwegian unemployment insurance (UI), we examine the behavioral impacts of soft and hard UI duration constraints. A constraint is interpreted as hard if a claimant cannot rely on any form of income support after exhaustion, and as soft if UI is replaced by follow‐on benefits or participation in active labor market programs (ALMP). We find that both hard and soft constraints raise the job hazard significantly, with surprisingly similar spikes at UI exhaustion. Participation in ALMP raises the probability of eventually finding a job, but at the cost of lengthening the overall job‐search period.     

SCREENING DISABILITY INSURANCE APPLICATIONS

This paper investigates the effects of stricter screening of disability insurance applications. A large‐scale experiment was set up wherein two of the 26 Dutch regions caseworkers of the disability insurance administration were instructed to screen applications more stringently. The empirical results show that stricter screening reduces long‐term sickness absenteeism and disability insurance applications. We find evidence for direct effects of stricter screening on work resumption during the period of sickness absence and for self‐screening by potential disability insurance applicants. Furthermore, stricter screening improves targeting efficiency without inducing negative spillover effects on the inflow into unemployment insurance.     

SKILL‐BIASED TECHNOLOGICAL CHANGE,UNEMPLOYMENT, AND BRAIN DRAIN

We develop a model of directed technology adoption, frictional unemployment, and migration to examine the effects of a change in skill endowments on the wages, employment rates, and emigration rates of skilled and unskilled workers. We find that, depending on the elasticity of substitution between skilled and unskilled workers and the elasticity of the matching function, an increase in the skill ratio can reduce both the relative unemployment rate and the relative emigration rate (brain drain) of skilled workers. We provide numerical simulations to support our findings and show that the effects are empirically relevant and potentially sizable.     

COMPETITION AND RELATIONAL CONTRACTS: THE ROLE OF UNEMPLOYMENT AS A DISCIPLINARY DEVICE

Abstract When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long‐term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.     

Two Questions about European Unemployment

A general equilibrium search model makes layoff costs affect the aggregate unemployment rate in ways that depend on equilibrium proportions of frictional and structural unemployment that in turn depend on the generosity of government unemployment benefits and skill losses among newly displaced workers. The model explains how, before the 1970s, lower flows into unemployment gave Europe lower unemployment rates than the United States and also how, after 1980, higher durations have kept unemployment rates in Europe persistently higher than in the United States. These outcomes arise from the way Europe's higher firing costs and more generous unemployment compensation make its unemployment rate respond to bigger skill losses among newly displaced workers. Those bigger skill losses also explain why U.S. workers have experienced more earnings volatility since 1980 and why, especially among older workers, hazard rates of gaining employment in Europe now fall sharply with increases in the duration of unemployment.     

The Interaction between Income Support Programs

Employment insurance (EI) and social assistance (SA) represent two key income support programs in Canada. The structure of these programs is similar to those found in many countries where unemployed individuals may use a number of sources to fund job‐search activities and provide income support during periods of diminished employment income. In this paper, we examine the nature of the interaction between the programs and their overall impact on labor market outcomes. We use the 1997 Canadian Out of Employment Panel data set to examine behavior of a set of individuals following the loss of employment. Results indicate that reductions in the generosity of SA results in lower use of both income support programs. Conversely, if the generosity of the EI program is curtailed this reduces use of the EI program and leads to greater use of the SA program.     

CYCLICAL BEHAVIOR OF UNEMPLOYMENT AND THE HELP WANTED INDEX: A CROSS SPECTRAL ANALYSIS

The unemployment rate and the help-wanted index are two frequently used indicators of the state of the labor market. Traditional regression techniques used in the analysis of the relationship between these two indicators and their cyclical behavior with business fluctuations have yielded varying results. Spectral analysis is used in this article to examine the cyclical behavior of the labor market indicators with respect to each other and with respect to a measure of aggregate economic activity in the United States. Very strong relationships are found, lending support to the rationale of using such indicators as labor market proxies. This application of spectral analysis also provides an illustration of the potential fruitfulness of spectral analysis in examining the cyclical relationships between economic time series.     

Discrimination and Resistance to Low‐skilled Immigration

Abstract. This paper shows that the immigration of some low‐skilled workers can be of advantage for low‐skilled natives when the host economy suffers from unemployment due to the presence of trade unions and an unemployment insurance scheme. This benefit arises if trade unions have appropriate bargaining power and preferences for members’ income, labor market discrimination against immigrants is strong enough and the unemployment tax rate is low.     

On the Time Sequence of Unemployment Benefits When Search is Costly

Should we cut the level of unemployment benefits, or reduce their potential duration? The answer depends on the way the unemployed search behaviour and unemployment insurance schemes interact. In this paper, we consider that unemployment insurance funds can be used to improve search. Resulting hazards are increasing over the unemployment spell prior to the exhaustion of benefits, and plummet immediately after it. Turning to policy implications, we assume the public decision–maker aims to minimize the average duration of unemployment under a resource constraint. First, we show the stationary relationship between average unemployment duration and unemployment benefit is hump–shaped. Second, raising benefits over a short duration can reduce average duration. Finally, we demonstrate that most of the time, a declining (yet always positive) benefit scheme is optimal.