substantially revised version appeared as DP No. 2280
This paper studies the effect of unemployment benefits on the unemployment and
subsequent employment duration using individual data from the European Community
Household Panel, for France, Germany, and the UK. The empirical analysis is based on a
two-state mixed proportional hazard model allowing for flexible duration dependence and
state specific unobserved heterogeneity. We find that recipients, relative to non-recipients,
face lower exit rates from unemployment, while an additional month in unemployment
increases their subsequent employment stability. This positive correlation between previous
unemployment and subsequent employment duration for the recipients is statistically
significant for the short-term unemployed in France and Germany. The results indicate that in
these two countries, which provide more generous benefits relative to the UK, recipients who
search for a longer period within the first year in unemployment obtain higher employment
stability.
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