Abstract
We test the predictions of an equilibrium search model about the effects of an increase in the maximum duration of unemployment benefits. We use the 1999 unemployment insurance reform of Portugal, a quasi-natural experiment. The reform increased the maximum duration of benefits for three groups of agents and maintained all features of the unemployment insurance for two other groups. We isolate the effects of the increase in the maximum duration of benefits and test the model. The model successfully predicts the effects on the unemployment rate, the labor force participation, and the levels of unemployment and employment.
Highlights
In 1999, the Portuguese government increased the maximum duration of unemployment benefits for workers with specific ages
We use this event to test if an equilibrium search model correctly predicts the effects of an increase in the maximum duration of unemployment benefits
We use the model of Alvarez and Veracierto (2000), a general equilibrium search model for which the unemployment insurance system is modeled through the replacement ratio, the criteria of eligibility, and the duration of unemployment benefits
Summary
In 1999, the Portuguese government increased the maximum duration of unemployment benefits for workers with specific ages. We first estimate the impact of the increase in the maximum benefit duration, following the literature on the effects of the unemployment insurance system on the labor market. The average treatment impacts on the duration of unemployment of benefit recipients are 48, 76, and 115 days for the 15–24, 30–34, and 40–44 age groups, respectively (Table 2). The probability of maintaining eligibility ψ implies that the expected duration of eligibility is 1/ (1 − ψ) periods As it is common in the literature, we use data on the average duration of unemployment benefits. The productivity process z approaches a random walk and the numerical algorithm cannot approximate precisely the theoretical distribution of z To circumvent this problem, we use a model period of 3 months for the 15–24 age group and 6 months for the groups 30–34 and 40–44.
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