The spike at benefit exhaustion: The role of measurement error in benefit eligibility

Abstract

Many studies have found that the exit rate from unemployment insurance benefits to employment increases at the end of the entitlement period. The magnitude of this “spike” in the job finding rate at benefit exhaustion is important for assessing the distortionary effect of unemployment insurance, whereas the shape of the job finding rate around that point is informative about the validity of the competing theoretical models of job search. Using exceptionally rich register data for Finland, we show that difficulties in measuring the time to benefit exhaustion can lead to severely biased estimates of the job finding rate around benefit exhaustion. When the time to benefit exhaustion is accurately measured, the job finding rate starts to increase two months prior to benefit exhaustion and peaks sharply in the last week of benefit eligibility, after which its drops immediately below the pre-spike level.