Research Discussion Papers, Bank of Finland
Should unemployment benefits decrease as the unemployment spell lengthens?
Abstract: It has become a conventional wisdom in economic policy
debate that in order to minimise adverse effects on employment,
unemployment benefits should decrease with the unemployment spell. This
paper, using a series of simple search models, shows that the theoretical
result regarding the optimality of a declining unemployment benefit profile
is largely a result of specific modeling assumptions and fails to hold in a
more general setting. While any pure reduction of unemployment benefits
always improves employment, a redistribution of unemployment benefits from
the long-term unemployment in favour of the short-term unemployed can
either increase or decrease unemployment and unemployment benefit
expenditure. The direction of the effect depends, inter alia, on the
structure of unemployment and on the extent to which employed workers can
reduce their lay-off probability.
Keywords: unemployment benefit; unemployment; search models; (follow links to similar papers)
31 pages, October 23, 2001
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