Time Limits in a Two-tier Unemployment Benefit Scheme under Involuntary Unemployment

Abstract

The consequences of introducing or tightening time limits on the receipt of high unemployment benefits are studied in a shirking model. Stricter time limits have an ambiguous impact on the net wage, and changes of utility levels of employed workers and recipients of high unemployment benefits have the same sign as the variation in the net wage. The utility differential between the two groups of unemployed shrinks. The relative income position of skilled workers moves in the same direction as the net wage of unskilled workers. When access to high benefits is denied for shirkers who are caught, stricter time limits may decrease employment. (JEL codes: H53, J41, J60)