Academic Literature

Unemployment benefit receipt is associated with longer reemployment duration study finds

Melike Wulfgramm and Lukas Fervers analyse the effect of unemployment insurance generosity and active labour market policy on reemployment stability in Europe in Unemployment and Subsequent Employment Stability: Does Labour Market Policy Matter?  (Adapted quotes to follow)

Faced with the challenge of high and persistent unemployment, European policy‐makers have been searching for labour market policies that promote quicker reintegration of the unemployed. As a result, two kinds of labour market reforms have been introduced over the last years. On the one hand, income support for the unemployed has become less generous through lower benefit levels, shorter benefit durations and stricter eligibility criteria. These policy measures aim at increasing the exit from unemployment by reducing the well‐confirmed disincentive effect of unemployment benefits (Katz and Meyer 1990; van Ours and Vodopievic 2008; Tatsiramos 2009). On the other hand, the focus has been shifted towards activating policy instruments which are designed to increase employment incentives and facilitate quicker matching of supply and demand in the labour market (Eichhorst 2009). In the public and scientific discourse, the costs and benefits of these reforms have mainly been judged with regard to their effect on the exit rate from unemployment.

Despite the importance of shortening unemployment duration, this exclusive focus neglects an essential aspect of the labour market: the sustainability of reintegration, i.e. the post‐unemployment employment stability.

The author argue that labour market policy evaluation requires a more comprehensive perspective which considers the long‐run effect on reemployment stability, since it is likely to be shaped by passive as well as active labour market policies.

They present empirical evidence for two hypotheses. First, the design of unemployment insurance is expected to matter. If generous unemployment benefits are available, the unemployed do not suffer from severe income losses. While this might lead to longer unemployment duration, it also enables the unemployed to take more time to search for jobs that better match their personal skills thus improving post‐unemployment job match quality and employment stability (Ehrenberg and Oaxaca 1976; Burdett 1979). Second, active labour market policy (ALMP) programmes intend to foster reemployment stability. On the one hand, training programmes aim at improving the skill level of the unemployed with a view to enhancing their chances of finding high quality jobs. On the other hand, counselling services tackle information deficits in the labour market, which can be assumed to improve the matching process. Up to now, these effects have been rarely studied at the European level. Using longitudinal EU‐SILC and OECD data, we aim to fill this gap by conducting comparative micro and multilevel survival analyses in order to test the hypotheses that generous unemployment benefits and ALMP spending promote reemployment stability.

Using EU‐SILC and OECD data, they conduct discrete time survival analyses with shared frailty specification to identify policy effects at the micro and macro level. Empirical evidence suggests that unemployment benefit receipt is associated with longer reemployment duration at the individual level. Furthermore, countries with more generous unemployment insurance and higher ALMP spending show a more sustainable reintegration record of previously unemployed workers. These results point to a policy trade‐off between the well‐confirmed disincentive and locking‐in effect of unemployment benefits and ALMP programmes on the one hand, and their positive effect on reemployment stability on the other hand.

Graph 1 shows the impact of unemployment benefits by simulating the survivor functions of two representative individuals that merely differ in their benefit receipt.

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Controlling for other characteristics as well as their employment history, individuals who did not receive unemployment benefits have a substantially higher risk of exiting into unemployment again, which endorses the argument that unemployment benefits support the sustainability of labour market reintegration. As can be seen in the graphical illustration, the survival rates diverge strongly within the first 12 months after re‐entry into employment. After 12 months, 33 % of non‐recipients are predicted to have fallen back into unemployment, compared to only 23 % of recipients of unemployment benefits that have the same characteristics. Although failure rates decelerate somewhat, the divergence continues within the second year of reemployment. After 24 months, a substantial difference between the survival rates has been achieved which then remains constant until the end of the observation period. Thus, unemployment benefit receipt mainly affects the hazard rates within the first months of reemployment, but has long‐term consequences for the absolute survival rates.

This paper shows that reemployment stability is to a large degree influenced by labour market policy in two ways. On the one hand, generous income support for the unemployed promotes reemployment stability. Recipients of unemployment benefits achieve substantially more stable reemployment than their counterparts who do not receive unemployment benefits. At the same time, countries which are characterized by more generous unemployment insurance tend to reach more stable reemployment. This confirms the argument that unemployment benefits act as a search subsidy thus improving job‐match quality. On the other hand, reemployment stability appears to be higher when countries spend more on training programmes and counselling services provided by the PES. Once again, these results provide an empirical confirmation for our argument that ALMP programmes foster reemployment stability via skill level increases and information deficit reductions. Methodologically, the analysis has been based on the comparison of individuals as well as a comparison of labour market policy indicators at the macro level. In this regard, this paper makes an innovative contribution to the scientific discussion as it analyses the effect of labour market policy on reemployment stability at the micro and the macro level for the first time.

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Capture d’écran 2013-02-06 à 16.02.52ftp://ftp.iza.org/RePEc/Discussionpaper/dp7193.pdf

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