sou · GZB32 · 2011-01-18 00:00:00 — We discuss the main empirical findings focusing on wages and employment dura- tion. The main conclusion regarding the effect of UI on wages sug- gests a weak positive effect. There is, however, variation in the evi- dence with some studies finding no effect while others finding positive effects.8 recent evidence suggests that extending benefit duration has a small positive effect on wages on average, but there is substantial heterogeneity as the effect is stronger at the bottom of the pre-unemployment wage distribution and is con- centrated at short unemployment durations (Centeno and Novo, 2009). The evidence on the effect of the UI system on employment duration is also limited and rather mixed. Evidence from (Belzil, 2001) and the US (Centeno, 2004) suggests that jobs accepted close to benefit termination have a higher dissolution rate while higher benefit levels increase the quality of job matches measured by the duration of the employment spell. A positive effect of benefits on the duration of subsequent employment is also found for Europe. which are accepted while being insured last longer; this effect is larger in countries with relatively generous benefit systems (Tatsiramos, 2009). In addition, similarly to find- ings for , evidence from suggests that those 8 and , 1976; Burgess and , 1976; Hoelen, 1977; Blau and Robins, 1986; and Blackburn (2000) find that more generous UI either in terms of the benefit level or longer entitlement periods increase re-employment wages. Classen (1977) finds no relationship between the level of UI benefits and re-employment wages. Bilaga 9 till LU2011 unemployed who obtain jobs close to and after the time when benefits are exhausted are significantly more likely to exit subse- quent employment and receive lower wages (Caliendo, Tatsiramos and Uhlendorff, 2009). This finding provides evidence that the increasing exit rate from unemployment induced by the declining profile of benefits might be associated with lower quality of jobs. Other studies, however, conclude that an increase of the benefit entitlement length reduces job-finding rates but does not have any effect on subsequent job match quality, measured in wage growth and job duration (Card, Chetty and , 2007; and Vodopivec, 2008). Bilaga 9 till LU2011 3Other policies influencing incentives in UI There are several other policies which might influence incentives in UI. In this section we discuss the way labor market policies and social assistance influence UI incentives. We also discuss the interaction of UI with employment protection legislation. 3.1Active labor market policies labor market policies (ALMP) may affect the behavior of UI benefit recipients through their effects on incentives to search for and accept jobs. ALMP may affect the duration of use of UI benefits whereby the effect can go both ways. ALMP may increase the duration of unemployment if participation in a program affects the eligibility for or renewal of unemployment benefits. There is very limited evidence on the interaction between UI and ALMP. Evidence from shows that UI benefit recipients close to benefit exhaustion are more likely to enter ALMP than unem- ployed workers without benefit entitlement (et al., 1996). Moreover, further evidence from shows that participation in programs allows participants to remain significantly longer on unemployment benefits, especially for those entitled individuals entering a program around the time of benefit exhaustion (Sianesi, 2004). ALMP, however, may decrease the duration of unemployment if workers want to avoid participation in the program. ALMP con- sist of a variety of programs such as counseling, training and wage subsidies. Some of these programs have a mandatory component which generates a threat effect, i.e. benefit recipients want to avoid having to enter the program. Sometimes there is a direct acti- vation program aiming to stimulate workers to find a job more Other policies influencing incentives in UI Bilaga 9 till LU2011 quickly.9 There are several studies that show the existence of threat effects in ALMP. The evidence is either based on the introduction of new programs or on real experiments. In the UK there are two programs which have been introduced in the recent years. The first is the Restart program which con- sisted of a series of mandatory interviews during which a counselor assessed the recent unemployment history of the worker and offered advice on search behavior, training courses and sometimes initiated direct contact with employers. The evaluation findings of this program suggest that interviews conducted earlier in the unemployment spell significantly decreased the unemployment durations and they also had long-run effects by reducing the male unemployment rate five years later by 6 percentage points (Dolton and O'Neill, 1996; Dolton and O'Neill, 2002). The second British labor market program that was introduced is the New for the , which was compulsory and directed to unemployed workers aged between 18 and 24. The program con- sisted of initial intensive job search assistance followed by various subsidized options including wage subsidies to employers. Evi- dence from the evaluation of the enhanced job search assistance suggests that the program increased the job finding rate of young men (et al., 2004). However, the findings are not clear as to whether the carrot of job assistance drives this positive effect or the stick of the tougher monitoring of job search. There are a number of experiments conducted in different countries related to various features of ALMP. These include alter- native work-search requirements and mandatory participation in a job search workshop imposed on unemployment benefit recipients in (Klepinger et al., 2002), the assignment of employed workers from to reemployment service activities (et al., 2003), or the mandatory participation in an activation pro- gram in (and , 2008).10 In all these experiments the main finding is that the obligation to participate in the program reduced the use of unemployment benefits, stimulated workers to leave unemployment more quickly but did not seem to affect the quality of post-unemployment jobs - in terms of employment and/or earnings. In addition, most of the effect 9Kreiner and Tranæs (2005) show that in a situation in which job search is unobservable it may be optimal to introduce workfare, i.e. requiring unproductive activities in exchange for UI benefits. Workfare allows for a distinction in incentives between voluntary and involuntary unemployed. 10See also Rosholm (2008). Bilaga 9 till LU2011 Other policies influencing incentives in UI caused by the mandatory participation in a program is in the begin- ning of the unemployment spell and in particular before the start of the program. In other words, the threat effect seems to be impor- tant in driving the results although in some cases positive treat- ment effects related to the job search programs cannot be ruled out. All in all, it is clear that ALMP affect incentives of UI recipi- ents to search for and accept jobs. Conditional on the characteris- tics of a UI system more activating ALMP lead to shorter dura- tions of UI spells. Social Assistance (SA) for the unemployed is typically available for the long-term unemployed for whom UI is exhausted and for the non-eligible for UI. In most cases social assistance is means-tested. To the extent that the differences between UI and SA in terms of benefit level and eligibility are smaller, UI recipients will have less of a need to find a job before their UI benefits expire (Pellizzari, 2006). In other words, in addition to reducing incentives when individuals receive a SA benefit, a generous SA system may also reduce the job finding incentives of UI recipients.11 Both employment protection legislation (EPL) and UI protect workers against uninsurable labor market risk. There are three key differences between the two institutions (Boeri and , 2008). First, EPL protects only those who already have a job. Sec- ond, EPL does not impose a tax burden on workers. Third, under EPL it is the employer who has to offer income to the workers laid off, while UI is a risk-sharing device that ends-up imposing a fiscal externality on all workers and employers. If UI is experience rated, the third difference between UI and EPL is reduced. When UI is experience rated and EPL is a pure transfer, it does not make much difference for those who have a job whether they are protected by 11 Pavoni and (2007) investigate an optimal welfare-to-work program, consisting of three phases: UI, monitoring of search, SA. In their theoretical model human capital depreciates with unemployment duration causing job offers decrease during unemployment. When unemployed reach the SA phase they are no longer required to search for a job as their job offer arrival rate is too low. Other policies influencing incentives in UI Bilaga 9 till LU2011 EPL or by UI. Except that the severance provided under EPL is generally provided in a single installment, while UI benefits offer a stream of (monthly) transfers up to the maximum duration of benefits. Employment protection legislation affects the hiring and firing decisions of firms. When EPL is strict workers have higher protec- tion against layoffs but also hiring rates are reduced. While lower firing rates affect the unemployment inflow, less hirings affect the unemployment outflow. Across countries there is a nega- tive correlation between the strictness of EPL and the generosity of the UI system. Countries with strict EPL have less generous UI systems and vice versa. Bilaga 9 till LU2011 4 The Swedish UI system Table 1 presents differences in labor market position across various age groups in . men and women – aged 15 to 24 – have a low employment rate, which is due to the fact that many youngsters are still involved in the educational system. men and women also have high unemployment rates which are related to them entering the labor market for the first time. Employment rates among prime age men and women – aged 25 to 54 – are high while unemployment rates are rather low. Among older men and women – aged 55 to 64 – employment rates are somewhat lower than among prime age individuals, but unemployment rates are very much the same for older and prime age individuals. The fact that unemployment rates among older workers are rather low does not necessarily mean that the UI system has no influence. Usually older employed workers have a low probability of losing their job so the fact that they have an average unemployment rate may point to unemployment duration being above average. to lack of information about inflow and durations we present in Table 2 unemployment by duration. Clearly older workers have a far longer duration of unemployment. Whereas for prime age males (females) the share of long-term unemployed (more than a year) in 2008 was () this was () among older workers. The rest of this section provides a brief description of the system and a comparison to the UI systems of other EU countries. has a so called Ghent system of UI. In the 1930s state support to the unemployment funds organized by the national trade unions was introduced (and , 2001). The Swedish UI system Bilaga 9 till LU2011 union-run unemployment funds were first successful in the of Ghent, hence the name. system is administered by 32 private unemployment insurance funds (2009), which cover the fields of activity or professions of trade unions.12 All unemployment insurance funds must be approved and registered by (), which supervises the unemployment insurance sys- tem and is responsible for ensuring application of the law and rules on unemployment insurance legislated by the Swedish parliament. Unemployment benefits are financed by tax revenue and the contributions of members of the unemployment insurance funds. Membership to an unemployment insurance fund is voluntary and is a requirement for receiving income-related benefits with the additional requirement of being a member of the UI fund for at least 12 months. Unemployed workers who are not members of a UI fund are entitled to a basic benefit under Unemployment Assistance (UA), which is substantially lower than the maximum income-related benefits. This basic amount is paid only to those who have reached the age of 20, while the income-related amount has no age limit. Both groups of unemployed workers are entitled to benefits if they meet some work and job search requirements. Workers are only entitled to benefits if they, during the last twelve months before becoming unemployed, have worked at least 80 hours per month during at least six months or at least 480 hours during six continuous months with at least 50 hours per month. The search requirements include to be registered at the public employment office, be ready for a job, actively looking for a job and be prepared to accept a suitable job offer. Those unemployed workers who are not eligible either for unemployment insurance or for unemployment assistance may receive social assistance, which is administered by the municipalities and is an income- and assets- tested benefit under the additional requirement of actively seeking employment. Benefits are paid during working days and the eligibility lasts for 300 benefits days (420 calendar days). Benefit duration is extended with another 150 days for those with children under at the end of the regular benefit period of 300 days. There is a waiting period of the first seven days of unemployment in which the unemployed worker is not entitled to benefits. 12 , and still have a Ghent system; abolished the system in 1938. Bilaga 9 till LU2011 The Swedish UI system Unemployed workers who are not members of a UI fund but meet the qualification requirements are entitled to UA and receive the basic insurance benefit. The basic insurance is paid out in pro- portion to the average hours worked, which amount to per day for a person who has worked full time, without absence. Unemployed workers who are entitled to the income-related bene- fit receive an amount based on their previous income from gainful employment, which has a declining profile. During the first 200 days, the beneficiary receives 80 per cent of previous earnings. For the remaining period until day 300, the amount is reduced to 70 per cent of previous earnings. The minimum amount for a per- son who has worked full-time is per day up to a maximum amount of per day. After the maximum benefit duration of 300 days the unemployed receive 65 per cent of previous income conditional on entering a labor market program (The job and development guarantee). Those less than 25 years of age face a different benefit structure. For those eligible for UI (income-related benefits) the declining profile of benefits has a different structure compared to those above age 25. In particular, the maximum benefit rate of 80 per cent is received only for the first 100 days, it is then reduced to 70 per cent for the following 100 days and drops to 65 per cent after 200 days. Those who do not qualify for UI and UA receive per day if they have completed upper secondary school or who are aged 20 or more. This corresponds to the study allowance paid to participants in tertiary education (not including subsidised loans). For those with incomplete upper secondary education aged 18–20, the benefits are per day, corresponding to the study allowance paid to upper secondary school participants. Addition- ally, participation in the job guarantee for youth program is required after the first 100 days as a condition for receiving further benefits. The program can last up to 15 months. 4.2Comparison with other EU countries The structure of the Swedish UI system has similarities to the sys- tems in other European countries but also differs in a number of dimensions. In Appendix 2 we provide a description of the main characteristics of the UI systems in the EU countries distinguish- The Swedish UI system Bilaga 9 till LU2011 ing between the general conditions and the benefit levels and dura- tions. One of the similarities between the Swedish UI system and that of most other EU countries is related to the eligibility conditions. These conditions include the requirement to be involuntary unem- ployed, being registered in the employment office and actively seeking for employment. Only in and in volun- tarily unemployed are eligible to UI, although in there is a waiting period of 12 weeks. For the eligible unemployed a waiting period of a few days exists in a number of countries. Apart from in which the waiting period is seven days, a waiting period also exists in , , , , and the UK and varies from 3 to 8 days. In this sense, has one of the longest waiting periods among these countries. Another similarity between the Swedish UI and that of the other EU countries is the existence of a qualifying period for eligi- bility. The requirement is a minimum number of weeks, months or days of employment during a specified period before entering unemployment. The exact requirements vary a lot across countries. In this respect is very similar to in that there is a minimum period of full-time employment required for the basic allowance and membership to an unemployment insurance fund of at least 1 year for qualification of earnings-related benefits. In most countries benefits are determined by the previous earnings of the unemployed. This is the case for the income-related part of the Swedish UI system. In addition, as it is the case for , most countries also impose a ceiling on the benefit amount. It is only , and who do not deter- mine a maximum monthly amount of benefits that can be received by an individual. The benefit rate is a percentage of the previous earnings varying from 50 per cent in to 90 per cent in . In this respect 's benefit rate of 80 per cent for the first 200 days is among the highest. One dimension in which the Swedish UI system differs from most of the other EU coun- tries is that the benefit rate has a declining profile, being lower after the first 200 days. It is only and that share this fea- ture with . As to the duration of benefits, differs from many other countries as benefit duration is fixed and does not depend or vary across unemployed workers. This is similar to and the UK, but differs from the structure of the UI systems of many Bilaga 9 till LU2011 The Swedish UI system In particular, benefit duration depends on the length of contribution and age in , , , , and . In it only depends on contributions, while benefit duration is unlimited in . Table 3 gives an overview of the differences in unemployment rates and employment rates between EU countries. In 2009 unem- ployment rates for prime age men ranged from a low in the to a high in . With the Swedish rate is well below the average of . Also the unemployment rate of prime age women is below EU average. The employment rate for prime age men does not vary a lot, from 78.0 to , with being somewhat above the average of . For prime age women the range of the employment rates is substantially lar- ger, from 59.1 to , with an average of . The Swedish rate of is close to the top end of the distribution. Table 3 also provides information about UI net replacement rates at the start of the unemployment spell (but following any waiting period). The net replacement rates are calculated at two- thirds of the average wage and at 1.5 times the average wage. And, they are calculated for two family types, a one-earner married cou- ple with two children and a single person without children. For a low wage couple with children the net replacement rate does not vary much, from 71 to with an average of and with being above average. For low wage single workers the range in net replacement rate across EU countries is substantially larger, from 54 to , with an average of and with again being above average. The variation in net replacement rates is larger and the relative position of is reversed for high wage workers. For a high wage couple with children the net replacement rate varies from 36 to with an average of and with being below average. For high wage single workers the range in net replacement rate across EU countries is even larger, from 23 to , with an average of and with again being below average. The last two columns of Table 3 show that irrespective of the type of family the drop in net replacement rate when going from a low wage to a high wage is among the largest in . Clearly the cap in UI benefits is more important in than in many other EU countries. Bilaga 9 till LU2011 5Policy issues concerning the design of the Swedish UI system In the final section we draw conclusions about relevant policy issues related to the design of the UI system. We confront the main lessons from the literature overview on UI related incentives with the characteristics of the Swedish UI system. The level of UI benefits in has the unique feature of a declining profile over the spell of unemployment. The maximum duration of benefits is uniform across various groups in the labor market. The existence of a fixed benefit duration with a declining profile of benefit levels is consistent with the theoretical evidence on the optimal design of UI as it creates incentives to find a job. The initial replacement rate of 80 per cent is quite high but due to the relatively low benefit ceiling the net replacement rate is much lower among high wage workers. The fixed maximum benefit duration in is different from other European countries where the maximum benefit duration is often age-dependent, either directly or through entitlement criteria that relate the maxi- mum duration of benefits to previous work experience. Similarly to , older workers in other European countries face a lower unemployment probability but they experience longer unemploy- ment spells. The rationale behind age-dependent unemployment insurance is twofold. The first is related to the labor market posi- tion of older workers who once unemployed might face worse employment . The second is related to the fact that young and older workers are characterized by different expected horizons in the labor market. Policy issues concerning the design of the Swedish UI system Bilaga 9 till LU2011 To the extent that the labor market position of older workers is weak the insurance component in the trade-off between providing insurance and reducing moral hazard is larger. However, uncondi- tional extension of benefits to older workers might reduce their re- employment incentives. Recent evidence suggests that in countries in which UI can be used as a pathway to early retirement unem- ployment for older workers is an absorbing state (Tatsiramos, 2010). The proximity to retirement might also modify the trade-off between insurance and incentives. For instance, a declining profile of benefits might not be effective in introducing incentives to exit from unemployment when there is short distance to retirement. As discussed in Section 2.1.5, the theory of optimal UI suggests that employment taxes can be combined with a declining profile of benefits in order to create incentives for exiting unemployment. For older workers incentives to search and find a job may be increased by providing employment subsidies. However, if the time horizon is too short this will not work either. Shortly before retirement – up to a couple of years – older unemployed workers may stop searching for a job altogether irrespective of the structure of benefits and taxes or subsidies on employment. Combining the UI system and pension system may revitalize search of older unemployed workers for example by taxing pensions in proportion to the length of the unemployment spells (Hairault et al., 2010).