Unemployment Insurance in Welfare States: Soft Constraints and Mild Sanctions

1. Unemployment Insurance in Welfare States:Soft Constraints and Mild Sanctions Av Knut Røed og Lars Westlie

2. Introduction • The Norwegian welfare system intends to secure all citizens with a reasonable income support. • This may lead to a moral hazard problem. • One may use a permanent stop in the Unemployment Insurance (UI) payment to offset these problems but: • We want to give people some income support • Not an credible threat. The unemployed know that they’re not left empty handed • This may call for soft constraints and mild sanctions to influence the job search activity.

3. Main Topics • How do the different constraints affect the job finding rate or the entrance into education. • How do the different constraints affect benefit shifting. • We will address these topics by using Norwegian register data. • Decomposing the duration dependence into an intrinsic and a UI-generated part.

4. The Norwegian UI system (1993-2002) • Before 1997 • “Activity-oriented” • 2*80 weeks + an activation period in between • 80+78 weeks (intermediate regime) • After 1997 • “Payment-oriented” • 156 weeks + waiting benefits • 156 (78) weeks • Own rules for previous state employees and completed military service

5. Previous research • Based on U.S data, Katz and Meyer 1990; Card and Levine 2000 finds that the threat of loosing UI benefits has a significant impact on the job finding rates • In Europe, there exists evidence on that UI duration extension (Hunt 1995) and benefit extension (Winter-Ebmer 1998) has reduced the job finding rates for elderly workers.

6. Scandinavian results • Based on a sequence of reforms towards stronger activity requirements, Rosholm and Svarer 2004 and Geerdsen 2006 finds a large positive effect on the transition to employment just prior to the exhaustion of unconditional benefits. • Carling et al 1996; 2001 report the same pattern in Sweden • In Norway, Røed and Zhang 2003; 2005, finds higher job hazard associated with exhaustion of the first benefit period

7. The data

8. The model • Mixed Proportional Hazard Rate model with 6 competing risks • Estimating period specific transition probabilities • Three final destinations • Employment • Other benefits (Sickness benefits and social security) • Education • Three internal transitions (these do not terminate the spell) • Labor market Programs • Sanctions (temporarily payment layoffs) • Part-time employment

9. The Mixed Proportional Hazard rate model (MPH) • MPH, continuous time hazard rate • Proportionality assumption • k=destination, i=individual, s=duration, w=observed covariates, v=unobserved covariates • The period specific transition probability • Assuming piecewise constant duration dependence

10. The index function • Calendar time (s) (96 dummies) • Intrinsic duration dependence (d). Discouragement, stigma etc (16*10 dummies) • UI-generated duration dependence (43 dummies) • State variable (z) (recording current or completed ALMP, sanctions or part-time work) • Individual characteristics (x). Age, work exp, gender, family, education, county, immigrants

11. Separating spell duration from remaining benefits • To separate the effect of duration from the effect of remaining UI benefits we use the system reform in January 1997 • Also: • Earlier unemployed may take up their old UI benefits until one year after the end of last spell. • Program participation • Unemployed without benefits • Unemployed with “indefinite” benefits

12. Unobserved Heterogeneity • We use a non-parametric approach (NPMLE) to account for unobserved heterogeneity. • Implies a discrete mass-point distribution, adding points until it’s no longer possible to increase the likelihood function. • The model are identified by • Properties of the MPH model (Abbring and Van den Berg, 2003) • Repeated spells (Van den Berg, 2001). • Time-varying explanatory variables (McCall, 1994; Brinch, 2006). • Censored and truncated spells. • The NPMLE method is tested in Gaure et al (2007)

13. Intrinsic duration dependencd

14. Total months of unemployment in the past four years 1-6 7-12 13-24 >24 3-6 7-12 13-24 >24 Number of months since last unemployment spell

15. UI-generated duration dependence(After 1997)

16. UI-generated duration dependence(before 1997)

17. Simulation • Using all spells that started in the new regime with 156 weeks of benefits. • Using the estimated model to simulate new unemployment spells in both old and new regime. • Making confidence intervals by using a parametric bootstrap procedure.

18. Effects of the 1997 regime

19. Simulert effekt av 1997 reformen

20. Effects of ALMP

21. Concluding remarks • Activity oriented UI-regimes reduces unemployment. • The harshness of the duration constraints are of minor importance. • The effects strong but also very myopic. • Unemployment duration from current and previous spells has a negative impact on the job hazard.