Unemployment_Benefits_&_Unemployment

This is the first of four notes, each one looking at the potential role of a specific
factor in explaining variations in unemployment over time across countries. The
four factors are: unemployment insurance, employment protection, shifts in relative
demand towards the skilled, and changes in tfp growth.
The evolution of unemployment benefits in the OECD is well described in Chapter
8 of the OECD Jobs Study. Unemployment benefits come in two forms: URempfoymenr
insurance, typically related to past earnings, and ending after a fixed
period of time-typically six months to two years; and unempfuymenr assistance,
typically unrelated to past earnings, and often without time limits. The replacement
ratio, the ratio of unemployment benefits to the past wage, varies over the
duration of unemployment, and the characteristics of the worker. The OECD has
constructed an average replacement ratio for each country over time. Figure 8-1
gives the evolution of the ratio over time for each country. Table 8-l gives the
ratio by duration, and by characteristics, for each country, for 1991.
I draw two main conclusions from this figure and this table. In many countries,
the largest increase in the replacement ratio predates 1973; since 1973, the replacement
ratio has typically not increased very much (with some exceptions, in
particular Denmark, Norway, Portugal). The average replacement ratio is lower
than one might have expected, based on anecdotal accounts. Looking at table
8-1, few entries have a replacement ratio above 70% (Sweden, Denmark in the
first year of unemployment), and the average ratio is typically well below 50%.
The average of the “average replacement ratios” in the last column is 29%
How should we think of the effect of unemployment benefits on unemployment?
Labor economists have typically focused on the effects of benefirs on search intensity,
and thus on unemployment duration. Typically taking the distribution of
wages as given, they have looked at the effects of benefits, and their exhaustion
on the exit rate from unemployment. Macro economists have typically focused on
the effects of benefits on the bargained wage, and thus the effects on equilibrium
unemployment. The two channels are distinct, but both are relevant.