published in: Review of Economic Studies, 2006, 73 (4), 1009-1038
This paper studies how changes in the two key parameters of unemployment insurance – the
benefit replacement rate (RR) and the potential duration of benefits (PBD) – affect the
duration of unemployment. In 1989, the Austrian government made unemployment insurance
more generous by changing, simultaneously, the maximum duration of regular
unemployment benefits and the earnings replacement ratio. We find that increasing the
replacement ratio has much weaker disincentive effects than increasing the maximum
duration of benefits. We use these results to split up the total costs to unemployment
insurance funds into costs due to changes in the unemployment insurance system and costs
due to behavioral responses of unemployed workers. Results indicate that costs due to
behavioral responses are substantial.
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