Stiftelsen Frischsenteret for samfunnsøkonomisk forskning Ragnar Frisch Centre for Economic Research 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.

Frisch Centre 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.

Frisch Centre The Norwegian UI system ( ) 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

Frisch Centre 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.

Frisch Centre 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

Frisch Centre The data Number of Spells Number of individuals Mean spell duration6.2 months Percent of spells ending in Job57.6% Other benefits24.7% Education17.8% Percent of spells with Sanction1.4% Labor market program18.1%

Frisch Centre 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

Frisch Centre 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 MPH, continuous time hazard rate –Proportionality assumption

Frisch Centre 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

Frisch Centre 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

Frisch Centre 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)

Frisch Centre Intrinsic duration dependencd

Frisch Centre Total months of unemployment in the past four years >24 Number of months since last unemployment spell >24

Frisch Centre UI-generated duration dependence (After 1997)

Frisch Centre UI-generated duration dependence (before 1997)

Frisch Centre 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.

Frisch Centre Effects of the 1997 regime

Frisch Centre Simulert effekt av 1997 reformen AllConditioned on the spell ending in EmploymentOther benefitEducation Regi me I Regime II/III Regi me I Regime II/III Regi me I Regime II/III Regi me I Regime II/III Mean unemployment duration Duration difference (Regime II/II I-Regime I) Lower 98% Upper 98%

Frisch Centre Effects of ALMP

Frisch Centre 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.