sou · GZB32 · 2011-01-18 00:00:00 — They explain this big difference by stating that the aim of counseling and monitoring is to provide unemployed workers with a permanent contract, which might be difficult to obtain for individuals who were previ- ously temporary employed. Furthermore, they find that counseling and monitoring significantly increases the job application rate. and (2006) find a very small and insig- nificantly positive effect of counseling and monitoring on the probability of finding work. Since counseling and monitoring are relatively inexpensive, the benefits, in terms of unpaid UI benefits, are approximately the same as the costs of providing counseling and monitoring. For the US, Ashenfelter et al. (2005) analyze the effects of a system of more intensive monitoring on labor market outcomes. Three of the four experiments give rise to positive effects on the exit rate to work. But the effects are all insignificant and quantita- tively very small. and Klepinger (1994) find, however, that much stricter job search requirements reduce the time recipients collect UI benefits in the US. Specifically, the requirement of making at least three employer contacts per week reduces the mean duration of unemployment for the treatment group by around three weeks compared with the mean duration in the absence of job search requirements. This requirement is much higher than in the (one employer contact per week) and in the programs studied by Ashenfelter et al. (2005). For the UK, Dolton and O'Neill (1996) consider job search assistance in combination with increased monitoring. Their target population consists of individuals who have been unemployed for six months in the UK in the early 1990s. This implies that it con- cerns a group of relatively disadvantaged individuals. They find a positive effect on the exit rate to work. Also Manning (2009) finds for the UK positive effects on outflow of tightened search Bilaga 8 till LU2011 Evidence on policy interventions reducing moral hazard for unemployed workers requirements, but he shows that the increased outflow is not nec- essarily to work.14 Another study for the UK finds that during periods without any monitoring reemployment rates are lower.15 (1995) provides a survey of US social experiments con- cerning job search assistance programs. It turns out that the effect on the exit rate to work increases in the intensity of the assistance. The decrease in the duration of UI dependence ranges from around half a week to more than three weeks. Finally, for , Micklewright and (2005) find that stricter monitoring only increases the reemployment of women above . This is a group that typically does not devote much effort to job search. A feature of the monitoring in is that the caseworker also acts as a matching agent who offers suitable vacancies to unem- ployed workers. We can conclude that the evidence on the effectiveness of coun- seling and monitoring is mixed and depends on the state of the business cycle and the design of the programs. Empirical studies often show that it is less effective to monitor unemployed workers with a small distance to the labor market. Monitoring more disad- vantaged unemployed workers seems to increase reemployment. The key prediction is thus that monitoring is more efficient in stimulating reemployment of the long-term unemployed and other disadvantaged groups, and has larger effects during recessions. Furthermore, the intensity of the policy is important. Stricter requirements have larger effects, but this may also reduce the qual- ity of the post-unemployment jobs.16 3.1.4Empirical evidence on sanctions Sanctions exist in many countries.17 Sanctions are not only given for insufficient job search effort, but can also be the result of other failures to comply with the rules of the benefit agency (e.g. when benefit recipients refuse to participate in a training program). Sanctions are often imposed as temporary reductions in the bene- fits level. Whereas imposing punitive benefits reductions have been 14Manning (2009) studies the program called seeker's allowance for welfare recipients. 15See McVicar (2008). 16See and (2010). 17See (1999). Evidence on policy interventions reducing moral hazard for unemployed workers Bilaga 8 till LU2011 found to have large effects on reemployment rates there is some recent evidence that sanctioned workers suffer in the long-run.18 The first studies on the effectiveness of benefits sanctions are from the and describe the 1990s.19 The results show that a sanction increases the transition rate from UI to work of women by about and about for men. Imposing a sanc- tion on the transition rate from welfare to work raises the exit rate to work with about . For illustration, the probability that a young man () find work within two years after inflow into welfare is 0.66. A sanction after six months increases this probability to 0.93. For an older man () a sanction increases the reemployment probability from 0.29 to 0.54. For a smaller effect of actually imposing sanctions has been found than in both Dutch studies.20 As mentioned before, there are two important differences between the Swiss and the Dutch policy regime on sanctions. First, in there exists a system of warning unemployed workers prior to imposing a sanction. Roughly one third of the warnings are followed by a sanction. The effect of a warning is as large as the effect of actually imposing a sanction. Second, has a stricter sanction regime than the . Whereas in the , the annual sanction rate during a spell of unemployment is below , in , this can be as high as . In the , reemployment rates of sanctioned individuals are often very low and there is much room for increases. In , also indi- viduals who already have higher reemployment rates get punished and therefore there is less room for increases in reemployment rates for sanctioned workers. Finally, for it is found that sanctions increase the reemployment rate by about 50 %.21 There are two recent studies on the long-term effects of sanc- tions.22 These studies show for and that imposing a sanction reduces the quality of the post-unemployment job (e.g. lower wage, shorter employment duration, fewer hours of work and lower occupational level). The main conclusion from the empirical studies is thus that sanctions do increase the exit rate to 18See Abbring et al. (2005), Lalive et al. (2005), Svarer (2007) and et al. (2004) for studies on short-run effects, and et al. (2009) and and (2009) for studies on long-run effects. All studies use the same non-experimental approach. 19Abbring et al. (2005) focus on UI recipients and et al. (2004) study welfare recipients. 20See Lalive et al. (2005). 21See Svarer (2007). 22Arni et al. (2009) and and (2009). Bilaga 8 till LU2011 Evidence on policy interventions reducing moral hazard for unemployed workers However, this comes at the cost of having worse long-term labor market outcomes. Reemployment bonuses usually involve the payment of a lump- sum amount to an unemployment worker who finds work. The idea is that this makes work more attractive and therefore stimu- lates unemployed workers to devote more effort to job search. Because unemployed workers are also less selective on which job to accept, the reemployment rate increases. During the 1980s there have been a number of experiments conducted in the US on reemployment bonus schemes. The first experiment was in (during 1984/1985), and it promised new applicants for UI benefits a cash bonus of for finding work (at least 30 weekly hours) within 11 weeks and the job for at least four months. The results show that the unemployment duration was reduced with approximately one week.23 Next, in the experiment (in 1987) the bonus amount declined dur- ing unemployment to zero after 11 weeks.24 The effect of a bonus on the job finding rate was significantly positive early in the offer period, when the bonus was largest. A comparison between the and experiments shows that the declining bonus offer in affected short-term unemployed rela- tively more while the bonus offer in had a sub- stantial impact on long-term unemployed.25 The 1988 and 1989 experiments in and study a number of different amounts and qualification periods and show that more generous bonus offers generated larger impacts than did less gen- erous offers but the overall effects are relatively modest.26 A per- manent bonus program might, however, encourage unemployed workers to file for UI. The target population in the US reemployment bonus experi- ments is new applicants for UI benefits. A more recent study for the considers long-term welfare recipients.27 Not only the target population differs, but also the institutional setup. 23See and Spiegelman (1987). 24See (1992). 25See Decker (1994). 26See Decker and O'(1995). 27See and (2010). Evidence on policy interventions reducing moral hazard for unemployed workers Bilaga 8 till LU2011 avoid having an effect on the inflow, only individuals on welfare for at least 12 months are entitled to receiving a bonus. However, welfare recipients close to collecting benefits for 12 months may anticipate this and reduce job search just before becoming eligible, which might cause a disincentive effect. There is, however, no empirical evidence of any substantial effects of the reemployment bonuses. A possible explanation is that the take-up of the bonuses is low (slightly less than ). A low take-up is not uncommon, in the reemployment bonus experiment the take-up rate was . Reemployment bonus schemes are very much related to in-work cash transfers. The idea of in-work cash transfers is that while being employed, low-income workers receive a temporary cash supplement to their income. An example is the Canadian Project, which was introduced in the early 1990s. This sub- sidy scheme applied to welfare recipients who accepted a full-time job and the payments could last up till three years. Even for long- term welfare recipients the subsidies had a positive effect on employment, but the effects were not permanent.28 There are also other possibilities to reduce the level of moral haz- ard. First, there are workfare programs, which require benefits recipients to work in jobs with a very low productivity. The latter is to avoid that workfare jobs crowd out regular jobs from the labor market. Because of the type of tasks participants perform, workfare programs are not intended to increase the human capital or skills of benefits recipients. Instead the goal of the programs is mainly to reduce their leisure. The underlying idea is that benefits recipients appreciate leisure, and that restricting their leisure reduces the value of being unemployed. Workfare programs should thus make benefit recipients more prone to accept job offers, and at the same time stimulate them to intensify job search. The risk of workfare programs is that they not only restrict the leisure of the benefit recipients, but also restrict the time they can devote to job search. It should be noted that workfare programs are widely imple- mented, mainly in welfare benefits systems. For example, the 28 (2005). Bilaga 8 till LU2011 Evidence on policy interventions reducing moral hazard for unemployed workers , and the US have extensive workfare pro- grams. The empirical evidence on the effectiveness of workfare programs is, however, very limited.29 Benefits recipients are more likely to leave the benefits system just before the moment of entering a program. The main difference between workfare programs and subsidized employment programs or wage subsidies is that such programs aim at increasing human capital by providing work experience in regular jobs. Usually a distinction is made between wage subsidy programs in the private sector and employment programs in the public sec- tor. The goal of wage subsidies in the private sector is to encourage employers to hire additional workers or to maintain jobs that would otherwise be destroyed. Often such programs are targeted at disadvantaged workers, such as long-term unemployed or very low- skilled workers.30 The empirical evidence shows that subsidized employment programs can be effective in improving the partici- pants' labor market outcomes. However, in the public sector such programs are most often detrimental for the employment prob- abilities of the participants. The main reason is that the type of jobs created for such programs are often non-regular jobs with no close counterpart in the labor market. Therefore, participants do not obtain any relevant work experience or additional human capital. 29Fredriksson and (2006) provide an overview of workfare programs, but they mainly point towards substantial threat. 30Kluve (2010) summarizes the empirical evidence of such programs. 4 Sickness and disability insurance The paper so far has mainly considered unemployed workers receiving either UI or welfare benefits. However, in many coun- tries, such as the Scandinavian countries and the , sick- ness and disability benefit schemes are more substantial (both in terms of recipients as well as expenditures). SI and DI programs also suffer from serious moral hazard problems.31 Whereas policy interventions for unemployment benefits schemes are mainly tar- geted at stimulating the outflow, it is widely believed that this is not very effective for disability programs. Increasing the exit rate from disability to employment is often assumed to be difficult. Therefore, most policies targeted at sickness and disability pro- grams aim at reducing the inflow. The empirical evidence for poli- cies targeted at sickness and disability programs is much more lim- ited than for unemployment programs. we first discuss the presence of moral hazard in SI and DI programs. In particular, we consider empirical studies on the effect of the generosity of benefits on the number of recipients of the programs. Next, we provide a theoretical discussion on the effectiveness of existing policies in the presence of moral hazard and we give a summary of the empirical evidence. Since most of the existing policies mainly focus on controlling the inflow, in our theoretical considerations we focus on what determines the inflow into SI and DI programs.32 Obviously, SI and DI programs differ substantially between countries. In from the start of work absenteeism the dis- tinction is made between sickness insurance for individuals who are temporary unable to work and disability insurance for permanently disabled workers. Sickness insurance has a waiting period of two 31See Bound and Burkhauser (1999) for a survey. 32This discussion extends the theoretical framework discussed in De et al. (2010). This model deals with Dutch institutions, but easily fits within the institutions of many other countries. Sickness and disability insurance Bilaga 8 till LU2011 weeks during which the employer pays benefits (no benefit is paid during the first day of sickness). After this waiting period the Social Insurance Administration continues paying the benefits. Diability insurance does not have a waiting period and benefits are from the start paid by the . In contrast, in the the distinction between tempo- rary and permanent disabilities is not made from the start of the sickness, and the two systems are integrated. During some waiting period of sickness all workers receive sick pay, which is a substan- tial fraction of the worker's wage. This sick pay is supplied by the employer and the labor contract is only terminated after the wait- ing period, when a worker enters disability insurance. Currently, the waiting period is two years. The Dutch waiting period is rather long, but most employers insure themselves at the commercial insurance market. For illustration in the waiting period is six weeks, while in it is 16 days. In a doctors certificate is required after seven days of sickness. In this is already the case after three days. In the , only after six weeks a doctor from an occupa- tional health service assesses the sickness of the worker and makes a plan for treatment. However, most employers insure themselves for sick pay at commercial insurers, who also provide doctor's visits and early interventions (depending on the contract type). Moral hazard problems in SI and DI benefits schemes are likely to be similar to the problems in UI benefits schemes. The theoretical prediction would be that a generous compensation would not induce workers to prevent becoming sick, and would not stimulate sick workers to return to work quickly. The benefits level would thus affect both the incidence and duration of sickness absentee- ism. However, the size of moral hazard may be very different between UI, and SI/DI, which might also explain why policies aiming at unemployment programs and sickness and disability pro- grams differ. The causal effect of the level of benefits on the incidence and duration of sickness absenteeism is informative about the presence of moral hazard in SI and DI benefits schemes. There are a number of relatively recent studies, which exploit reforms in benefits Bilaga 8 till LU2011 Sickness and disability insurance schemes to estimate the causal effects of benefits on sickness absenteeism. A Swedish reform in 1991 reduced the level of com- pensation for sick workers from of the wage to a level of during the first three days, and from day four until day 90. This substantially reduced the incidence of sickness absentee- ism.33 That higher benefits cause more sickness absenteeism is not specific to . A German reform involved reducing the gener- osity of sickness benefits.34 In particular, from October 1996 onwards, mandatory employer compensation during the first six weeks of sickness absenteeism was reduced from to . The reform caused a increase in the fraction of employers without any sickness absenteeism. Furthermore, short-term sick- ness absenteeism was reduced by about . It should be noted that the reform was the government's response to the belief that the German sick pay system suffered from substantial moral haz- ard. A similar effect was found for the US where a reform was stud- ied in which the maximum benefit level for sickness absenteeism was increased.35 This only affected high-income workers, who could receive up till extra benefits after the reform. This caused substantially more time-out-of-work among high-income individuals. The empirical evidence thus points towards the pres- ence of moral hazard in SI and DI benefits schemes. 4.2Potential effects of policy instruments In this section, we provide a discussion of the potential effects of policy instruments in sickness and disability programs. We focus on insurance programs, either SI or DI, with some waiting period during which the employer is responsible for sick pay. So the dis- cussion should fit most of benefit schemes. We keep the discussion relatively general such that it does not apply only to one specific institutional setting. Such an approach is most useful when considering the empirical evidence which deals with different countries. 33See and (2002, 2005). Also Henrekson and (2004) show that in sickness absenteeism is higher if benefits are more generous. 34See Ziebarth and (2009). 35See et al. (1995). Sickness and disability insurance Bilaga 8 till LU2011 When a worker cannot work due to an illness or impairment, the worker's productivity is lost. The legitimacy of the absence is often checked by independent physicians, who can be the GP or a doctor from an occupational health service. It might be clear that a doctor's assessment very early in the sickness spell reduces illegiti- mate sickness absenteeism. However, this also places a heavy bur- den on physicians, who must assess a lot of workers returning to their jobs after a short period of sickness. In most European countries sick workers are enti- tled to receive sick pay, for which the level depends on the worker's wage. pay is often provided by the employer. After some period, the employer stops paying sick pay and the worker enters a DI scheme. We refer to the period of sick pay as the waiting period (before becoming eligible for DI). There are some obvious effects of the length of the waiting period. If the waiting period is long, the financial risks for the employer are larger. A long waiting period will thus discourage employers to use DI as channel to lay off workers. Employers might insure against the risk of sick pay. Commercial insurance companies will (most likely) use experience rating to determine premiums (i.e. the premium level depends on the firm's history of sickness absenteeism). This will, of course, also provide incentives to reduce sickness absenteeism within the firm. Also governments might use experience rating when deter- mining the premiums for DI. Obviously, more premium diversifi- cation for DI has the same effect to the employer as extending the length of the waiting period. Employers with high inflow rates have higher costs. The empirical evidence discussed in the previous section showed that less generous benefits schemes reduce sickness absenteeism. Employers also have an incentive to avoid that workers become sick. workers are not productive for the firm, while employers are responsible for sick pay. However, in some cases, it is more attractive to lay off a worker using DI. Often DI benefits are more generous than UI benefits, individuals have fewer (job search) requirements, and entry requirements are often less strict. There- fore, in the past, employers have used DI as lay-off channel, for example as an alternative to early retirement. This indicates that there is substitution between the inflow into different social insur- ance programs.36 36 The substitution between DI and UI is studied by (2006) and Riphahn (1997) for and , respectively. Bilaga 8 till LU2011 Sickness and disability insurance During the waiting period of sickness absenteeism, employers are obliged to organize reintegration activities and workplace accommodations. The goal of these activities is that the individual returns either to her old job or to an alternative job. In the Dutch case the DI agency screens if the employer has provided sufficient reintegration activities. This screening is done when the sick worker applies for DI benefits towards the end of the waiting period. If according to the DI administration the employer did not offer the minimum requirements, the DI administration can impose a sanction on the employer. The probability of getting a sanction, and the size of the sanction, increases with the extent of noncompliance. Reintegration efforts are, of course, costly to employers. Employers choose their reintegration activities such that marginal costs equal marginal returns. The returns to reintegration activities are not only reduced threats of getting a sanction, but if reintegra- tion activities are effective, also a higher probability of earlier work resumption and hence reduced sick pay. If optimal reintegration effort already exceeds the minimum requirements imposed by the DI administration, the employer's behavior will not change. How- ever, if optimal effort is below the minimum requirements, impos- ing minimum requirements increases reintegration activities. If such activities are effective, it increases work resumptions rates during sickness absenteeism and DI application rates decrease. This is a direct effect of a screening policy of DI applications. Imposing minimum reintegration requirements and screening also has an indirect effect. It reduces the attractiveness of the DI program to potential applicants and triggers a mechanism of self- selection or self-screening. The decision to start a DI application process involves a comparison of expected utilities of alternatives, such as unemployment, early retirement and continuing work. Screening reintegration requirements increases the costs of apply- ing for a DI benefit.