sou · GZB32 · 2011-01-18 00:00:00 — Providing age-dependent benefits in the form of longer benefit durations for older workers in combination with a tax on pensions will provide more insurance and at the same time introduce incen- tives to search for employment. Eligibility conditions include general conditions of being available for work and actively searching for a job, the qualifying period that is required to be employed in order to be eligible for benefits, the waiting period that is required before the benefits are available for the unemployed and the condition to be laid off. In all these con- ditions is very much in line with other European countries so there seems no reason to consider adjustments to the system. These conditions are also in line with the optimal design of a UI system discussed in Section 2.1.5. Bilaga 9 till LU2011 Policy issues concerning the design of the Swedish UI system Linking eligibility to benefits with the employment history is certainly an effective mechanism to prevent unemployment cycles with short intermediate employment spells. The qualifying period may also be linked with the unemployment duration in a way that enhances the incentives to search for a job. This can be imple- mented by explicitly linking the duration of the current unem- ployment spell with the minimum months of employment required in order to renew the entitlement for UI in a future unemployment spell. This mechanism can enhance the incentives to search for employment throughout the unemployment spell and avoid the situation in which the unemployed search more intensively only closer to when benefits are about to expire. In the current Swedish UI system an unemployed worker can renew his or her entitlement conditional on working for 6 months before re-entering unemployment. If the worker is laid-off earlier than the 6 months then he or she may receive the remaining days of benefits from the previous spell. One possibility to link directly the duration of the unemployment spell with the employment requirement is to consider a qualifying period that is increasing with the unemployment duration. For instance, for unemployment spells below 6 months (or the equivalent in benefit days) the qualifying period may be the current 6 months of employment. For each additional month in unemployment beyond month 6 the qualifying period increases by one month. That is, an unemployed worker who finds a job after 7 months will need to work for 7 months in order to renew his or her entitlement to benefits. This can increase up to 12 months for those who reach benefit exhaus- tion. In case the worker re-enters unemployment before satisfying the employment condition then he or she will receive the remain- ing benefit from the previous unemployment spell. For a worker who becomes unemployed after 6 months of work the benefit duration will be the full period if the worker has been unemployed for 6 months. For those who have been unemployed for more than 6 months the benefit duration will be the remaining benefits left up to 6 months depending on the length of the previous unemploy- ment duration. Contrary to the eligibility condition of a qualifying period (minimum employment period) that affects the incentives during employment, linking the qualifying period with the length of the unemployment duration introduces additional incentives during the unemployment spell. These additional incentives complement Policy issues concerning the design of the Swedish UI system Bilaga 9 till LU2011 the entitlement effects that exist with the existing declining profile of benefits. Additionally, this mechanism might reduce the spike in the exit rate from unemployment close to when benefits are about to expire by defining another focal point earlier in the unemploy- ment spell, i.e. the unemployment duration with the minimum employment duration required to renew the entitlement to bene- fits. In the example above, this point was an unemployment dura- tion of 6 months. 5.3Relation of UI to other policies When it comes to the effect of other policies on UI incentives we discussed Labor Market Policies, Social Assistance and Employment Protection Legislation. Concerning ALMP there have been recent improvements to avoid adverse incentives to participate in these programs. Earlier, the clock in UI stopped ticking if an unemployed worker entered a labor market program during an ongoing insured unemployment spell. Under the new rules days spent in programs are counted in the same way as days with UI benefits. To the extent that partici- pation in ALMP is compulsive and thus creates incentives for at least some workers to avoid participation by accepting regular jobs we see no reason to change the current system. Concerning social assistance, the interaction with UI might reduce incentives to search for a job. When social assistance is gen- erous the structure of UI might not be effective in introducing incentives to exit from unemployment. Concerning EPL there are no direct incentive effects on the UI system. To the extent that EPL might be reduced for reasons other than the functioning of the UI system this may have effects on workers' demand for additional UI. 5.4Business cycles and funding of UI Throughout our paper we consider a UI system in a comparative static sense, i.e. the key elements – level and duration of benefits – are not varying over the business cycle. We also provide only a limited discussion of issues related to the funding of the UI sys- tem. The main reason is that there is any UI incentive Bilaga 9 till LU2011 Policy issues concerning the design of the Swedish UI system directly related research on both issues. In this section we discuss both a cyclical UI system and the funding of UI in relation to potential incentives. There are two ways business cycles affect unemployment. The first, which is a direct one, is related to an increase in layoffs and a reduction in hiring by firms in the case of a recession. The second, which is indirect, is related to a change in the composition of unemployed workers. For instance, during a recession more older workers and higher educated ones enter the unemployment pool. Labor market policies should adjust to the extent that the compo- sitional change is large. Most of the existing empirical evidence, however, suggests that the compositional changes are rather lim- ited.13 The occurrence of longer unemployment durations during recessions might still call for a UI structure that is sensitive to the business cycle. For instance, in the US, the maximum duration of UI benefits is extended from 26 to 39 weeks when the labor market in a particular state enters a recession and unemployment increases above a certain level. This system has been present for decades. Recently, there was a further extension of unemployment benefit duration related to the current crisis. Depending on the unem- ployment rate at the state level, under the heading of Emergency Unemployment Compensation, benefits could be extended up to 53 weeks and under the heading of Extended Benefits another 20 weeks of benefits could be added, resulting in a total maximum of 99weeks of benefit provision.14 Cyclical adjustment of maximum benefit durations will com- pensate the unemployed for a loss of income but also affects incentives for UI recipients. An extension in a depressed market might reinforce moral hazard problems particularly for low income workers. Furthermore, once a cyclical system is introduced work- ers might anticipate extensions of maximum benefit durations reducing their efforts to find a job. Finally, extensions might be more needed in systems in which social assistance is rather limited as is the case for the U.S. In the case of with an established 13See for example Imbens and (2006), Abbring, and (2001), and (2001), Verjo (2008) who find a small compositional effect. Rosholm (2001) finds instead that compositional variation is important in explaining unemployment duration and that the average quality of those becoming unemployed improves during booms. 14As far as we know there are no empirical studies investigating the recent benefit extensions in the U.S. Policy issues concerning the design of the Swedish UI system Bilaga 9 till LU2011 safety net through social assistance we see reason to introduce a cyclical UI system. Finally, concerning the funding of the UI system, the Swedish combination of state funded UI benefits, which partially rely on voluntary contributions through membership fees of UI funds, might also indirectly affect incentives. In 2004, the amount of UI paid was covered for less than by membership fees, the rest was paid through taxes. Recently, the funding of the UI system has been changed: membership fees are increased substantially and a small degree of experience rating has been introduced (, 2009). As union fees in general included UI fund fees, union mem- bership became much more expensive leading to a drop in union density. Unemployed workers who are not members of a UI fund, but meet the same work and job search requirements, are entitled to a fixed daily benefit, which is substantially lower than the maxi- mum income-related benefit. Increasing UI membership fees will reduce UI membership and this reduction in membership may be very selective – i.e. may trigger adverse selection because at the employed workers with a low unemployment probability balancing expected benefits and costs will choose not to become a member of a UI fund. This can potentially lead to under-insurance for a significant part of the unemployed and reduce the number of unemployed workers eligible for UI. Bilaga 9 till LU2011 Steady state unemployment depends on inflow into and outflow from unemployment. The overall effect of the generosity of UI on unemployment depends on its relative effect on the two flows. UI provides unemployed workers with benefits in order to smooth consumption, but also creates disincentives for employed workers to retain their jobs and unemployed workers to find new jobs. The design of UI needs to consider this trade-off between insurance and incentives. Benefit structure and eligibility conditions are the most impor- tant elements for the design of UI. The benefit structure deter- mines the replacement rate and the duration of benefit receipt, which shape the incentives to search for a job and, therefore, the unemployment outflow. The eligibility conditions, which affect the unemployment inflow, specify the requirements in order to be eli- gible for UI. These include general conditions of being available for work and actively searching for a job, the qualifying period that is required to be employed in order to be eligible for benefits, the waiting period that is required before the benefits are available for the unemployed and the condition to be laid off. Overall, the unemployment situation in is relatively good. The unemployment rate is below the EU average, and the incidence of long-term unemployment is among the lowest in Europe. There exist, however, some heterogeneity with older workers experiencing low unemployment rates but long unem- ployment spells. The design of the Swedish UI system has integrated all the incentive mechanisms that are known to influence the outflow and inflow into unemployment. These include the declining profile of the benefits, which is unique among the EU countries, and the eli- gibility conditions such as the qualifying period and the waiting period. Bilaga 9 till LU2011 One concern with the current situation is the declining mem- bership rates in the UI funds. time this may lead to an increase in the membership fees, which can further reduce partici- pation. This reduction in the UI membership may be very selective and trigger adverse selection by attracting only those with a rela- tively higher risk of becoming unemployed. This will affect the financial stability of the UI funds and might trigger a spiral of fur- ther increases in the premiums and declines in membership. This might lead to under-insurance for a significant part of the unem- ployed and reduce the number of unemployed workers eligible for UI. Finally, there is room for improvement in combining more insurance with more incentives to work. 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Bilaga 9 till LU2011 Appendix A: Characteristics of the Swedish UI system Available for att least 3h/day or /week Actively looking for a job in the last year* Worked for at least 6m (80h/m) or for 480h (50h/m) 2m replaced with parental leave or military service * Extension of time period (last year) if sick or chlidren <3yrs Member of UI society for 12m Benefit Amount – Percent of Average Earnings in the Preceeding 12 months 320SEK/day and full time job 300 days (60 weeks) Additional 150 days if children <18 If caring for child: Amount as for +25 Activation – Work and Development Guarantee Offered after 300 days After 15 months in Mandatory if receiving benefits Appendix A: Characteristics of the Swedish UI system Bilaga 9 till LU2011 B. Unemployment Assistance Available for at least 3h/day or /week Actively looking for job Worked for at least 6m(80h/m) or for 480h(50h/m) in last year* 2m replaced with parental leave or military service *Extension of time period (last year) if sick or children <3yrs 320 SEK7day for full time job Not paid to workers below age 20 For those below 25: option for municipalities For older workers: if beneficial C. Youth Guarantee Program After 100 days in unemployment A.see A2 if qualify for UI B.See B2 if qualify for UA C.If not qualify for UI and UA benefits depend on educational qualifications With Upper Sec. Incomplete Upper Sec. 48 Sek/day Bilaga 9 till LU2011 Appendix A: Characteristics of the Swedish UI system Unemployment rates and employment rates byg age and gender; rate (%) rate (%) rate (%) rate (%) Employmente rate = employment as a share of the population;