American Economic Association

Unemployment Benefits, Unemployment Duration, and Post-Unemployment Jobs: A Regression Discontinuity Approach Author(s): Rafael Lalive Source: The American Economic Review, Vol. 97, No. 2 (May, 2007), pp. 108-112 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/30034430 Accessed: 08/09/2010 13:56 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aea. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

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and Benefits,Unemployment Duration, Unemployment Jobs:A RegressionDiscontinuity Approach Post-Unemployment By RAFAEL LALIVE*

Structural unemployment appears to be strongly correlated with the potential duration of unemploymentacross Organizationfor Economic Co-operationand Development(OECD) countries (Stephen Nickell and RichardLayard 1999). The idea is that extendedbenefitduration discouragessearchingfor ajob and thus leads to prolongedunemployment. In this paper, I propose testing this idea by studying discontinuouschanges in benefit duration at the age of 50, which are embedded in the Austrian unemploymentinsurance system. In particular,job seekers who become unemployed at 50 years of age or older and satisfy a previous work requirement are eligible for 52 weeks of extended benefits rather than 39 weeks. Moreover, due to special restructuring demandsin the state-ownedsteel sector,Austria temporarily implemented a regional extended benefit program (REBP) covering job seekers who enter unemploymentat 50 years of age or older, who had been living in certain regions of Austria for at least six months, and who satisfy a previous work requirement.Those individuals were eligible for 209 weeks of benefits instead of 39 weeks. Austrianunemploymentinsurance rules create a rich design allowing us to study the effects of small increases in benefits by 13 weeks (39 to 52 weeks) in regions that were excludedfrom the extendedbenefitprogramand large benefitextensionsby 170 weeks (39 weeks to 209 weeks) in regions with access to the extendedbenefitprogram.Because these benefit entitlementrules were discontinuousin age, the correspondingcausal effects can be identifiedin a regressiondiscontinuityframework. This paper contributesto two strands of the literature. The first strand is concerned with measuringthe effects of potential benefit duration on unemployment duration. Recent contributionsto this literatureinclude David Card * University of Lausanne, Ecole des HEC, DEEP, CH-1015Lausanne,and CEPR,CESifo, IEW (Universityof Zurich),IFAU, and IZA (e-mail: [email protected]). 108

and Phillip B. Levine (2000); Lalive and Josef Zweimtiller(2004); Jan C. van Ours and Milan Vodopivec (2006b); and Card, Raj Chetty, and Andrea Weber(2006). The main finding in this literatureis thatextendedbenefitsincreaseunemployment duration.The second strandof the literatureis concernedwith measuringthe effects of the unemploymentinsurance system on the quality of post-unemploymentjobs. Two recent studies are van OursandVodopivec (2006a) and Card, Chetty, and Weber (2006). Neither study finds any effect of the potential benefit duration on the quality of post-unemploymentjobs. This papergoes beyondthe existing literature in providingevidenceon the effects of very large and small benefitextensions.Whereasthe existing literaturehas analyzedthe effects of changing benefit durationby one or two quarters,this paperanalyzes the effects of adding one quarter (13 weeks) as opposed to adding more than 13 quarters(170weeks)to the unemploymentbenefit duration.Moreover,this paperprovidesevidence of the effects of largeandsmall changesin benefit durationon unemploymentduration,durationof job search,and post-unemployment job quality. The outline of this paper is as follows. Section I providesbackgroundon the unemployment insurancesystem, on the regionalextended benefit program, and on the early retirement rules in Austria. Section II discusses the dataset. Section III providesdescriptiveevidence on the effects of large benefit extensions on unemployment duration. Section IV provides the regression analysis of the effects of both large and small benefit extensions on unemployment durationand post-unemploymentjob quality.In section V, we summarizeour findings. I. Background This section provides a brief overview of the three features of the Austrian Social Security regulationsthat are relevantfor this paper.First, the potential duration of unemployment benefit (UB) payments is dependent on previous

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JOBS UNEMPLOYMENT BENEFITS,DURATION,AND POST-UNEMPLOYMENT

109

experience, but, as of August 1989, it is also dependenton age at the beginning of the unemployment spell. Those 40-49 years old receive 39 weeks of unemploymentbenefitsif they have worked for 312 weeks within the last 10 years priorto the currentspell. Those 50 years old and older receive 52 weeks of unemploymentbenefits if they have been employedfor at least 468 weeks within the last 15 years. Second, the regional extended benefit program (REBP)provided209 weeks of UB if ajob seeker meets the following criteria at the beginning of his or her unemploymentspell: (a) is age 50 or older; (b) has a continuous work history (780 weeks of employment during the last 25 years prior to the currentunemploymentspell); (c) has lived in one of 28 selected labor market districtsat least 6 monthspriorto the claim; and (d) became unemployed after June 1988 or is unemployed in June 1988. The REBP was initially expected to be in effect until December 1991.However,the Austrianparliamentdecided to extend the programuntil August 1993, after which it was abolished. A third measureaffecting olderjob seekersis Sonderunterstiitzung(special income support). The special income support program provides benefits for up to one year.Benefits throughthis programare 25 percent higher than unemployment benefits which are capped from above by the pension benefit the individualis expected to receive from the pensionsystem. Special income supportis availableto men 59 years old or older and women 54 years old or older,thus serving as a bridge into regularearly retirement,which is available to men at the age of 60 and to women at the age of 55.

since 1972. This ensures that only workerswho satisfy the work experience requirementwith a very high probabilityare includedin the sample. The data contain information on the month and year of birth, and month and year of entry into unemployment.This allows us to calculate the age at entry into unemploymentby counting the number of years and months of a person's life beforehe or she enteredunemployment.The empirical analysis restrictsattentionto individuals 46 to 53 years old (and 11 months) at the beginning of the unemployment spell. This is the only age bracketin which both women and men do not have access to special income support on the first day of the unemploymentspell. The resultingdatasetcontains informationon 40,028 individualsenteringunemploymentfrom a regularjob in the nonsteel sector. On average these job seekers remain unemployed for 25 weeks. About 81 percent of all unemployment spells end in a transitionto a regularjob. Of the remainingspells, 1 percentare rightcensored at the end of the observationwindow,4 percentare right censored due to a break in the unemployment spell exceeding 4 weeks, 5 percentexit to long-term sickness (exceeding 3 months), and 8.5 percent exit to early retirementprograms. Those finding a job searchfor 11 weeks on average, whereasthose who do not find workremain unemployed for an average of 85 weeks. The data contain informationon daily earnings, that is, annualearningsdivided by days worked.The change in log daily earnings between the preand the post-unemploymentjob is 0.057, so job seekers gain about5.7 percentin daily earnings. Note that this gain could also reflect changes in hours workedratherthan changes in wages.

II. Data

III. DescriptiveEvidenceon the Effectsof ExtendedBenefits

The empiricalanalysisforthe regionalextended benefitprogramuses administrativeinformation on all individuals enteringunemploymentfrom ajob in the nonsteel sectorbetween August 1989 and July 1991. This time period covers the longest possible time period where REBP is introducedbutno otherchangesin benefitentitlement take place. The analysisfurthermorefocuses on individualswith a "continuous"work history.A continuous work history is defined as a career with a ratioof actualto potentialworkexperience of at least 0.7 (the REBP requiresa ratio of 0.6)

Figures 1 and 2 provide graphical evidence of the effects of extendingunemploymentduration from 39 weeks to 209 weeks in regions with REBP. Figure 1 shows average unemployment durationfor men 46 to 53 years old. Individuals who have not reachedthe thresholdof 50 years of age remainunemployedfor 13 weeks on average. In contrast,averageunemploymentduration exceeds 26 weeks in almost all age cells for individualsage 50 or older.Thereis a significant discontinuity in average unemployment dura-

AEA PAPERSAND PROCEEDINGS

110

MAY2007

52 156

130

39

(weeks)

(weeks)

104 26 78 duration

duration

52 13 26

unemployment

unemployment

0

0

46

47

48

49

50

51

52

53

54

age (years)

46

47

48

49

50

51

52

53

54

age (years)

at threshold= 14.798;withstd. err.= 1.928. Discontinuity

at threshold= 109.645;withstd. err.= 4.927. Discontinuity

FIGURE1. THE EFFECTOF 170 WEEKSOFEXTENDED

FIGURE2. THEEFFECTOF 170 WEEKSOFEXTENDED

BENEFITS FOR MEN

BENEFITS FOR WOMEN

Source: Own calculations, based on Austrian Social Security data.

Source: Own calculations, based on Austrian Social Security data.

tion that occurs between individualsage 49 and 4 quartersand individualsage 50 and 1 quarter. This suggests that there is a strong effect from adding 170 weeks of unemploymentbenefits to the averagedurationof unemploymentspells. Figure 2 concentrates on women in the age bracket 46 to 53 years old entering unemployment in treatedregions and it displaystwo striking facts. First, there is a very salientincrease in unemploymentdurationat the age of 50. Women who areslightlyyoungerthan50 leaveunemployment on average after about 16 weeks. Women who are slightly older than 50 do not exit unemployment for more than 130 weeks on average. Thus, there appearsto be a significantincrease in unemploymentdurationby at least 110 weeks. Second, in the 50- to 53-yearage bracket,there is a very strong decrease in averageunemploymentdurationfrom morethan 130 weeks (age 50 years and 1 quarter)to less than52 weeks (age 53 years and 4 quarters).This evidence is consistent with an interpretationthat a substantialfraction of eligible women remainunemployeduntil they turn 54 years old, the minimum age requiredin the special income supportprogram.

that identifies the treatmenteffect allowing for potentiallydifferentlinear trendsin age on both sides of the 50-year-old threshold (see Lalive forthcoming). The first two columns in row A of Table 1 show the effects of extended benefits on unemployment duration, replicating the graphical analysis in the previous section. Columns 3 and 4 report the effects of extending benefits by 13 weeks for men and women, respectively. Surprisingly,there is no effect from adding a quarter to the maximum benefit duration for men. In contrast, average unemploymentduration increases by about six weeks for women. Table 1, row B, studies the effects of extended benefits on the fraction leaving unemployment for a job. The baseline probability of leaving unemployment for a job is about 0.9 for all groups (not shown in Table 1). Extendingunemployment benefits by 170 weeks reduces the fraction of men living in treatedregions leaving for a job by 4.4 percentagepoints. The effects of extended benefits on the transitionto a job are much stronger for women. The extended benefits policy leads to a reductionin the transition to work by 53 percentagepoints. This is in line with the early retirementprovisionsthat are availableto women once they turn 54 years old. In the regionsthatare not coveredby REBP, extending benefitsby 13 weeks does not appear

IV. EconometricResults Table 1 reportsthe resultsof a series of regression discontinuity analyses based on a model

VOL.97 NO. 2

JOBS UNEMPLOYMENT BENEFITS,DURATION,AND POST-UNEMPLOYMENT TABLE 1-THE

Benefits extended by (weeks) Sample A. Unemploymentduration(weeks) B. Fractionleaving for job

EFFECTS OF EXTENDED BENEFITS ON LABOR MARKET OUTCOMES

170 Men

170 Women

13 Men

13 Women

14.798 (1.717)*** -0.044

109.645 (6.088)*** -0.526

-0.326 (0.973) -0.011

6.067 (2.314)** 0.061

(0.013)*** C. Durationuntil exit to job (weeks) D. Change in log earnings Number of spells

111

1.542 (0.471)*** -0.000 (0.006) 9,734

(0.041)*** 2.924 (1.087)** 0.010 (0.008) 5,659

(0.007) -0.585 (0.392) -0.001 (0.008) 17,572

(0.038) 2.935 (0.811)*** -0.020 (0.016) 7,063

Notes: Each row contains estimated effect of extended benefits. Age-cell clusterrobust standarderrorsare in parentheses. Source: Own calculations, based on AustrianSocial Security data.

to affect the final job search destination. For both women and men, the share leaving for a job remains unchanged. Table 1,row C, displaysthe effects of extended benefits on the length of time it takes to find a regular job. Strong benefit extensions lead to relativelyweak extensionsof the durationuntil a regularjob is found.Durationuntil ajob is taken increases by about 1.7 weeks for men. The correspondingeffect is about2.9 weeks for women. Thus, even though the maximum benefit duration is increased by more than three years, the durationof a successful job search increases by less than 0.02 weeks per additionalweek of benefits granted. What happens with weak benefit extensions?The 13-weekbenefit extension does not affect the durationof a successfuljob search for men, but it does prolong the job search by about 3 weeks for women. The analysis in Table 1, row C, is based on the subsample of job seekers who find a job at the end of the unemploymentspell, a potentially selective subsample.Note, however,that we do not find any evidence of a discontinuity in the pre-unemploymentearnings at the thresholdof 50 years of age, except for the male job seekers living in treatedregions.Thus, thereis no strong evidence for selectivity with respect to the previous wage. Table1,rowD, providesevidenceof the effects of extendedbenefitsonjob quality.In particular, the analysisis basedon the changein the log daily earningsin the post-unemployment job compared to the pre-unemploymentjob. In line with recent findingsby Card,Chetty,and Weber(2006) and van Ours and Vodopivec(2006a), we do not find thatextendedbenefitsaffect averagedaily wages.

V. ConcludingRemarks This paper studies the effects of small (13 weeks) and large (170 weeks) extensions of unemployment benefits in Austria. Findings indicate that large benefit extensions increase unemployment duration, reduce transition to a regular job, and increase the duration until a new job is taken, but do not have a discernible effect on post-unemploymentjob quality as measured by earnings in the new job. In contrast,small benefitextensionsdo not necessarily increaseunemploymentduration.While thereis a statisticallysignificantincreasein durationfor women, no correspondingeffect is present for men. Small benefit extensions do not affect the transitionto ajob orjob quality,but they do prolong the durationof a successfuljob search. In summary,this analysis offers at least two conclusions.First,extendedbenefitsdo not affect the duration of a successful job search very strongly.Changes to benefit durationappearto inflate the time until a job seeker enters another social insurance program. Second, changes in benefitdurationdo not affect the quality of postunemploymentjobs, but large changes in benefit durationappearto reduce the numberof transitions to regularjobs. REFERENCES Card, David, and Phillip B. Levine. 2000. "Extended Benefits and the Duration of UI Spells: Evidence from the New Jersey Extended Benefit Program."Journal of Public Economics, 78(1-2):107-38.

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Card, David, Raj Chetty, and Andrea Weber. 2006. "Cash-on-Handand CompetingModels of Intertemporal Behavior: New Evidence from the Labor Market."National Bureau of Economic ResearchWorkingPaper 12639. Lalive,Rafael.Forthcoming."HowDo Extended Benefits Affect UnemploymentDuration?A RegressionDiscontinuityApproach."Journal of Econometrics. Lalive, Rafael, and Josef Zweimiiller. 2004. "BenefitEntitlementandUnemploymentDuraJournal tion:The Role of Policy Endogeneity." of Public Economics, 88(12):2587-2616. Nickell, Stephen, and Richard Layard. 1999. "Labor Market Institutions and Economic

MAY2007

Performance."In Handbook of Labor Economics. Vol. 3C, ed. Orley Ashenfelter and David Card, 3029-84. Amsterdam: Elsevier Science, North-Holland,3029-84. van Ours, Jan C., and Milan Vodopivec.2006a. "Durationof Unemployment BenefitsandQuality of Post-UnemploymentJobs: Evidence from a NaturalExperiment."The WorldBank Policy ResearchWorkingPaper4031. van Ours, Jan C., and Milan Vodopivec.2006b. "How Shortening the Potential Duration of UnemploymentBenefits Affects the Duration of Unemployment:Evidence from a Natural Experiment."Journal of Labor Economics, 24(2): 351-78.

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