This article appears in the following Oxford Review of Economic Policy issue: CAPITALISM AND INEQUALITY [View the issue table of contents]
Unemployment compensation and high European unemployment: a reassessment with new benefit indicators
* Schwartz Center for Economic Policy Analysis (SCEPA), The New School, New York, e-mail: howell{at}newschool.edu
** SCEPA, The New School, New York, e-mail: rehmm151{at}newschool.edu
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Abstract |
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Generous unemployment benefits lie at the heart of the conventional explanation for persistent high unemployment. The effects of benefit generosity on work incentives are more ambiguous in a broader behavioural framework in which workers get substantial disutility from unemployment (given income) and know that unemployment has scarring effects in the future. The micro evidence suggests modest effects of changes in generosity, but there are reasons to doubt that the impacts on national unemployment rates are consequential. The empirical case for the orthodox prediction comes from cross-country regressions on the OECD's gross replacement rate (GRR), but the published evidence is mixed, and we find little support in the pattern of annual changes in the GRR and the unemployment rate for OECD countries over the last three decades. We take advantage of new and much improved net replacement indicators from the OECD, which show little correlation with either the GRRs or with unemployment and employment rates. We conclude that the available evidence does not offer compelling support for the conventional view.
Key Words: unemployment • unemployment insurance • gross replacement rate
We thank Teresa Ghilarducci and SCEPA for supporting this project, and John Schmitt, Wiemer Salverda, Ken Mayhew, Duncan Foley, and two anonymous referees for comments and suggestions. We are also extremely grateful to Lyle Scruggs and the OECD's Andrea Bassanini, David Grubb, Herwig Immervoll, and Paul Swaim for data, explanations, clarifications, comments, and patience. Thanks, above all, to Andrew Glyn.
1 See also Di Tella and MacCulloch (2002), Clark (2003, 2009), Blanchflower and Oswald (2004), Shields and Wheatley Price (2005), and Sullivan and von Wachter (2007).
2 All three of these studies cite Holmlund's survey (1998) for microeconometric evidence supportive of a strong benefit-generosity-to-unemployment effect. But what Holmlund actually writes appears quite different: ‘Do the estimates from micro data give reliable answers to general-equilibrium questions about the effects of UI on unemployment? In general, the answer is no’ (p. 125). Holmlund concludes that ‘[t]he weight of the evidence suggests that increased benefit generosity causes longer spells of unemployment and probably higher overall unemployment as well. But there remains a considerable degree of uncertainty regarding the magnitudes of these effects’ (p. 137).
3 In this study, the authors attempted to deal with policy endogeneity, which may have affected the results of Katz and Meyer (1990).
4 Other studies find little or no effect on post-unemployment job quality (Card et al., 2007; Lalive, 2007; van Ours and Vodopivec, 2008). But we are aware of no studies that show that greater benefit generosity produces worse post-unemployment labour-market outcomes for benefit recipients.
5 Atkinson and Mickelwright (1991) refer to the ‘duration of benefit’ scores from Layard and Bean (1989), which are similar: all four countries receiving an ‘indefinite’ score in the Layard data that are reproduced in Atkinson and Micklewright get the same score in Table 5 of Layard et al. (1994), which is the source for the benefits variable in the scatter plot.
6 These data were generously provided by David Grubb of the OECD.
7 It goes unmentioned that, while these levels of benefit generosity have remained stable at high levels since 1995 for these four countries, their unemployment rates have been consistently lower than Germany’s. Indeed, three of the four (Sweden is the exception, but just barely) have shown lower unemployment rates than the USA since the late 1990s, despite a much lower US net replacement rate.
8 These are Nickell, 1997; Elmeskov et al., 1998, Blanchard and Wolfers, 2000; Belot and van Ours, 2001; Bertola et al., 2001; Nickell et al. 2003.
9 The results are robust to variations in the starting and ending points.
10 This series was kindly provided by David Grubb (see Carcillo and Grubb, 2006).
11 This is based on personal correspondence with David Grubb.
12 These are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Ireland, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Switzerland, Sweden, the United Kingdom, and the United States.
13 These are defined as workers aged 25–54 years. Data are available for most countries from 1971 until 2006 from the OECD Labour Force Statistics.
14 The standard unemployment rate is calculated for workers aged 15–64.