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Empirical Economics

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31-03-2017

Accelerating the transition to employment at benefit exhaustion: still possible after four years of unemployment?

Authors: Lars Pico Geerdsen, Stéphanie Vincent Lyk-Jensen, Cecilie Dohlmann Weatherall

Published in: Empirical Economics | Issue 3/2018

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Abstract

This paper provides evidence of how the long-term unemployed react to the threat of running out of unemployment insurance (UI) after receiving it for nearly 4 years. To identify the effect of UI exhaustion, we make use of a 1999 Danish legislative change that progressively reduced potential benefit duration from 5 to 4 years. We find that shortening UI duration hastens the transition to employment throughout the unemployment spell up to benefit exhaustion even if it occurs as long as 4 years later. However, although the proportional effect is large, it is small in absolute value.

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For men in particular, Caliendi et al. (2013) find that jobs accepted close to and after UI exhaustion are associated with lower quality, whilst those accepted when they are still insured tend to have higher quality (i.e. the UI recipients can be more selective).

The UIFs are private associations of employees or self-employed persons organised solely for ensuring economic support in the event of unemployment. However, UI is largely financed by the state.

1 EUR \(=\) 7.45 DKK.

Employment on the side, refusal of job offers, cheating or lock-out can lead to UI reduction.

As the PBD is reduced in the passive period, individuals did not have different lengths of the activation period. Had such differences existed, they could have affected the effect at the end of entitlement. Nevertheless, Rosholm and Svarer (2008) do not find a threat effect for Danish workers with more than 1 year of unemployment.

Whilst a new reform in 2007 reduced the passive period, the maximum duration of UI benefits remained unchanged. In 2010, a new reform reduced the maximum duration of UI from 4 to 2 years.

As the previous reform dated 1994 was fully implemented first in January 1998, we look only at individuals starting a fresh period in 1998.

Theoretically, individuals starting a fresh spell in 1998 and who were unemployed during the entire PBD experienced a reduction in 9 months at the most.

Den Registerbaserede Evaluering Af Marginaliseringsomfanget (DREAM), Administrative Recorded Evaluation of the Extent of Marginalisation.

Individuals who are not in a legal sense searching for work receive at least one of the following subsidies: unemployment subsidy for the not-labour-market-ready unemployed (includes special courses, workplace internships), social assistance for the not-labour-market-ready unemployed (includes special courses, workplace internships), sabbatical leave, disability pension, early retirement, student subsidy, flexjob (special working conditions) subsidy, rehabilitation and sickness benefits.

These definitions are based on Statistics Denmark’s classification of the population into three groups: native Danes, immigrants, and descendants of immigrants (i.e. the second generation of immigrants). Native Danes are individuals born in Denmark with at least one parent who is not only a Danish citizen but was also born in Denmark. Immigrants (first generation) are defined as foreign-born individuals with foreign-born parents or parents with foreign citizenship. Descendants of immigrants (second generation) are defined as individuals born in Denmark to foreign-born parents or parents with foreign citizenship. In the analysis, we group first- and second-generation immigrants under the ‘immigrant’ category.

Individuals only regain a fresh spell if they worked at least 52 weeks during the preceding 3 years.

The data show that 90% of the 5-week breaks occur in summer, when people are expected to take a holiday.

According to this definition of calendar time, the reform is implemented in the beginning of month 13.

\(\hbox {PBD}_{is} \left( \tau \right) = 60\) for all first fresh UI spells that started in 1998 (\(\tau \le \)12) before the reform was implemented. From Fig. 2, we can further deduce that for fresh UI spells that start after the reform \(PBD_{is} \left( \tau \right) = 51\) for 12 \(< \tau = 22, {\hbox {PBD}}_{is} \left( \tau \right) = 50\) for \(\tau = 23, {\hbox {PBD}}_{is} \left( \tau \right) = 49\) for \(\tau = 24\) and \({\hbox {PBD}}_{is} \left( \tau \right) = 48\) for \(\tau > 24\).

\(d_{ist} \) measures the total sum of months which individual i has spent as unemployed in 1998. That is, \(d_{ist} =t+\sum \nolimits _{j=1}^{j=S-1} T_{ij}\) measured in calendar month December 1998 (or \(\tau +t=12\)), where \(T_{ij}\) denote, the duration of the sth unemployment spell since first entry in 1998. Given that individuals enter the sample with a fresh unemployment spell in 1998, it is not possible to gain the right to a subsequent fresh UI period prior to January 1999.

To incorporate market conditions at entry, we also include local unemployment rates as covariates.

The parameters and error terms are now state-specific.

The three states are staying unemployed, transiting into employment and transiting into other social benefits.

For the duration effect of unemployment on the transition into employment, see Appendix Fig. 8.

This effect is measured in comparison with the reference category ‘15 or more months until UI exhaustion’.

We use the lower bound of the 95% confidence interval.

For the duration effect of UI on the transition to other benefits, see Appendix Fig. 9.

To investigate heterogeneity, we attempted to estimate interaction terms between individual characteristics and UI durations, but these specifications of the model did not converge.

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Title: Accelerating the transition to employment at benefit exhaustion: still possible after four years of unemployment?
Authors: Lars Pico Geerdsen
Stéphanie Vincent Lyk-Jensen
Cecilie Dohlmann Weatherall
Publication date: 31-03-2017
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 3/2018
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-017-1236-3

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