How Changes in Potential Benefit Duration Affect Equilibrium Unemployment

Abstract

This paper uses microdata to evaluate the impact of an increase in maximum bene.t duration on the steady-state unemployment rate.We draw on policy changes in Austria that extended maximum benefit duration from 30 to 52 weeks for individuals above age 50 and from 30 to 39 weeks for individuals between ages 40 and 49.We use these changes to estimate the causal impact of benefit duration on labor market flows and find that (i) the policy changes lead to an increase in the steady-state unemployment rate between 20 % and 50 %; (ii) surprisingly, most of the increase is due to an increase in the inflow into unemployment, whereas the decrease in the outflow from unemployment is modest; (iii) the effects are stronger for women than for men, but are otherwise rather robust across population subgroups.