Abstract
A recent reform to the UK unemployment insurance (UI) system has reduced the duration of entitlement from 12 to six months. The UI and welfare systems interact in the UK in such a way that exhaustion of UI for married individuals has potentially large disincentive effects on the labour supply of spouses. A model of labour supply is estimated for married women allowing for endogenous unemployment durations of husbands and wives. We distinguish between transfer programme induced incentive effects; correlation between labour supply and wages within couples; complementarity between the leisure times of spouses; and a discouraged worker effect.
Highlights
The adverse work incentive effects of Unemployment Insurance (UI) and UnemploymentAssistance (UA) programmes (such as Income Support (IS) in the UK and Aid for Families withDependent Children (AFDC) in the USA) are well known
This suggests that focussing on the participation margin may be inappropriate as, even after controlling for endogeneity, it would only reveal the net effect which is of ambiguous sign
The novel features of the modelling are that we allow husband unemployment to be endogenous, and we discriminate between non-participants and the involuntarily unemployed
Summary
The adverse work incentive effects of Unemployment Insurance (UI) and Unemployment. Assistance (UA) programmes (such as Income Support (IS) in the UK and Aid for Families with. The extent to which spousal labour supply adjustments can maintain family income when another household member is unemployed is limited by married women’s relatively low earnings potential. UI and UA transfer programmes provide a state-contingent income stream which in part counteracts the negative income shock from husband’s unemployment Such programmes may reduce wife’s employment response to husbands unemployment. In our estimates of a labour supply model for married women here, we allow for endogenous husband unemployment duration in order to address the problem of correlation between spouse unobservables. We accommodate wife unemployment duration so as to distinguish between labour market non-participation and inability to obtain work This is applied to the UK UI and UA programmes for a sample of married couples. The labour supply disincentives from the welfare system facing women married to men who remain unemployed are made significantly worse by the reform
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