unemployment insurance in welfare states: soft constraints and mild sanctions
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Unemployment Insurance in Welfare States: Soft Constraints and Mild Sanctions. Av Knut Røed og Lars Westlie. Introduction. The Norwegian welfare system intends to secure all citizens with a reasonable income support. This may lead to a moral hazard problem. - PowerPoint PPT PresentationTRANSCRIPT
Stiftelsen Frischsenteret for samfunnsøkonomisk forskning
Ragnar Frisch Centre for Economic Researchwww.frisch.uio.no
Unemployment Insurance in Welfare States:
Soft Constraints and Mild Sanctions
Av Knut Røed og Lars Westlie
Frisch Centre
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.
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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.
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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
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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.
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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
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The data
Number of Spells 1 145 777
Number of individuals 665 068
Mean spell duration 6.2 months
Percent of spells ending in
Job 57.6%
Other benefits 24.7%
Education 17.8%
Percent of spells with
Sanction 1.4%
Labor market program 18.1%
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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
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The Mixed Proportional Hazard rate model (MPH)
• k=destination, i=individual, s=duration, w=observed covariates, v=unobserved covariates
• The period specific transition probability– Assuming piecewise constant duration dependence
exp( ) 1 exp exp
expit
it
kit kik kit ki kit ki
k K kit kik K
w vp w v w v
w v
expkis kis kiw v
• MPH, continuous time hazard rate– Proportionality assumption
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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
,kit kt it kd it k it k it k itw s d b z x
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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
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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)
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Intrinsic duration dependencd
0
.25
.5
.75
1
1.25
1.5
Re
lativ
e ha
zard
ra
te
0 5 10 15 20 25 30Spell duration in months
Employment Other benefits Education
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0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0
1
2
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
0 10 20 30 0 10 20 30 0 10 20 30
2 3 4 5
6 7 8 9
10 11 12 13
14 15 16
Employment Other benefits Education
Re
lativ
e ha
zard
ra
te
Spell duration in months
Total months of unemployment in the past four years
1-6 7-12 13-24 >24
Num
ber
of m
onth
s si
nce
last
une
mpl
oym
ent s
pell
3-6
7-12
13-24
>24
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UI-generated duration dependence(After 1997)
0
1
2
3
0
1
2
3
0 6 12 18 24 30 36 42
0 6 12 18 24 30 36 42
New regime (36 months)
New regime (36 months + waiting-benefits)
Employment Other benefits Education
Re
lative
ha
za
rd r
ate
Spell duration in months
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UI-generated duration dependence(before 1997)
0
1
2
3
0
1
2
3
0 6 12 18 24 30 36 4221 39
0 6 12 18 24 30 36 4221 39
Old regime (2*80 weeks)
Intermediate regime (80+78 weeks)
Employment Other benefits Education
Re
lative
haza
rd r
ate
Spell duration in months
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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.
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Effects of the 1997 regime
0
.02
.04
.06
.08
0 12 24 36 48 60Spell duration in months
Difference Lower 98 percent
Higher 98 percent
Unemployment surplus in the new regime
-.08
-.06
-.04
-.02
0
0 12 24 36 48 60Spell duration in months
Difference Lower 98 percent
Higher 98 percent
Employment surplus in the new regime
-.01
-.005
0
.005
.01
0 12 24 36 48 60Spell duration in months
Difference Lower 98 percent
Higher 98 percent
Other benefits surplus in the new regime
-.015
-.01
-.005
0
0 12 24 36 48 60Spell duration in months
Difference Lower 98 percent
Higher 98 percent
Education surplus in the new regime
Fra
ctio
n o
f sp
ells
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Simulert effekt av 1997 reformen
All Conditioned on the spell ending in
Employment Other benefit Education
Regime I
Regime II/III
Regime I
Regime II/III
Regime I
Regime II/III
Regime I
Regime II/III
Mean unemployment duration
5.86 7.43 5.41 7.02 8.72 10.25 5.26 6.52
Duration difference (Regime II/II I-Regime I)
1.57 1.61 1.53 1.25
Lower 98% 1.47 1.49 1.21 1.06
Upper 98% 1.69 1.76 1.78 1.43
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Effects of ALMP
-.01
0
.01
.02
.03
0 12 24 36 48 60Spell duration in months
Difference Lower 98 percent
Higher 98 percent
Unemployment surplus with ALMP effect
-.02
-.01
0
.01
0 12 24 36 48 60Spell duration in months
Difference Lower 98 percent
Higher 98 percent
Employment surplus with ALMP effect
-.015
-.01
-.005
0
.005
0 12 24 36 48 60Spell duration in months
Difference Lower 98 percent
Higher 98 percent
Other benefits surplus with ALMP effect
-.01
-.005
0
.005
0 12 24 36 48 60Spell duration in months
Difference Lower 98 percent
Higher 98 percent
Education surplus with ALMP effect
Fra
ctio
n of
spe
lls
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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.