The equilibrium impact of unemployment insurance on unemployment: Evidence from a non-linear policy rule

Abstract

We estimate the “macro effect” of an increase in the generosity of unemployment insurance (UI) on unemployment in Sweden using regional data. The national UI benefit formula features a benefit ceiling and a statutory replacement rate, and does not take regional wage differentials into account. Changes in the national rules are useful for identification, since a change in the benefit ceiling, for example, has a greater impact on UI generosity in a high-wage region than in a low-wage region because a greater fraction of the workforce will be affected by the benefit ceiling in the high-wage region. We implement this identification strategy using data for the Swedish municipalities over the time period 1992–2014. Our estimates suggest that the macro elasticity of an increase in UI on unemployment is around 3. This is twice as large as the corresponding “micro elasticity”, which we estimate to 1.4–1.5 using data from the same time period.