unemployment insurance in welfare states: soft constraints and mild sanctions

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


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)


Re

lative

ha

za

rd r

ate


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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)


Re

lative

haza

rd r

ate


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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



Higher 98 percent

Employment surplus in the new regime

-.01

-.005

0

.005

.01



Higher 98 percent

Other benefits surplus in the new regime

-.015

-.01

-.005

0



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



Higher 98 percent

Unemployment surplus with ALMP effect

-.02

-.01

0

.01



Higher 98 percent

Employment surplus with ALMP effect

-.015

-.01

-.005

0

.005



Higher 98 percent

Other benefits surplus with ALMP effect

-.01

-.005

0

.005



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.

unemployment insurance in welfare states: soft constraints and mild sanctions

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