Abstract
Abstract While there is a fairly broad consensus regarding the potential adverse effects of generous unemployment benefit insurance on steady-state employment, the short-term effects of benefit reforms are not well-established. This paper contributes to fill this gap by estimating impulse responses to benefit reform “shocks” identified for a panel of OECD countries. Findings indicate that although it takes time for unemployment benefit reforms to pay off, such reforms do not appear to entail any negative short-run effects. There is however some suggestive evidence that reducing unemployment benefits could have negative short-run effects in “bad times”. JEL classification E02, E24, E60, J38, J58, J68
Highlights
While the theoretical case for public unemployment insurance is compelling (Blanchard and Tirole 2008), the potential adverse effects of high benefit replacement rates on steady-state employment have long been identified in mainstream labor market theories (e.g. Layard et al 1991; Pissarides 2000)
While a negative short-term impact is a theoretical possibility – at least under certain conditions, such as if the country considered is a small member of a monetary union – in all such models, whether it materializes in practical simulations depends on the specific design features of the models and their key calibrated parameter values, as well as on how labor markets are represented
Based on some identification of reform “shocks” and the estimation of associated impulse response functions, this paper has found robust evidence that unemployment benefit reforms deliver employment gains only gradually, typically over a period of several years
Summary
While the theoretical case for public unemployment insurance is compelling (Blanchard and Tirole 2008), the potential adverse effects of high benefit replacement rates on steady-state employment have long been identified in mainstream labor market theories (e.g. Layard et al 1991; Pissarides 2000). In the presence of Keynesian features in the economy, benefit cuts could lower aggregate demand temporarily weaken output and employment, thereby delaying the gains from reform. This could happen for instance if the unemployed have an above-average marginal propensity to consume While a negative short-term impact is a theoretical possibility – at least under certain conditions, such as if the country considered is a small member of a monetary union – in all such models, whether it materializes in practical simulations depends on the specific design features of the models and their key calibrated parameter values, as well as on how labor markets are represented.
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