I POLICY RESEARCH WORKING PAPER 2753

# **Summary findings**

Sanchez-Paramo studies the potential disincentive effects of unemployment insurance and social assistance payments on the duration of unemployment in the Slovak Republic. For this purpose, she uses new, very detailed data on receipt of benefits from the Unemployment Registry (1990-2000) and the Labor Force Survey (1996, 1999, and 2000). She employs a flexible methodology that makes it possible to identify behavioral changes that may occur as the quantity and duration of the benefits change over time, as well as behavioral differences between recipients and nonrecipients. This approach, she argues, constitutes a more accurate test for the presence of incentive and disincentive effects than those presented before in the literature. She expands the scope of her analysis to study the effect of receiving benefits on several outcomes in addition to exit from unemployment (for example, job seeking behavior and duration of unemployment).

She finds important behavioral differences between those who receive benefits and those who do not. Recipients tend to spend more time unemployed, but they also look for employment more actively than their counterparts, have more demanding preferences with respect to their future jobs, and find jobs in the private sector more often. In addition, these jobs turn out to be better matches than those obtained by nonrecipients (with the quality of the match measured by its duration). Moreover, the behavior of recipients varies tremendously depending on whether they are actually receiving benefits or not. Once their benefits are exhausted, they exit the Unemployment Registry at a higher rate, search more actively, and move into private sector jobs more often. So when these workers are used as their own control group, there is strong evidence that both unemployment insurance and social assistance or support have important disincentive effects, not only on the duration of unemployment, but also on job seeking behavior and on exit to employment.

Analyzing the effect of unemployment insurance and social assistance on poverty, Sanchez-Paramo concludes that these programs bear most of the burden in the fight against poverty. But this protection does not come free, since significant disincentive effects are associated with receiving benefits. Thus any reform plan should take into account both of these aspects of the programs, along with the government's goals for the programs.

This paper-a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region-is part of a larger effort in the region to help governments reform safety net systems to make them more efficient and effective, without losing a poverty focus. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Carolina Sanchez-Paramo, room 18-105, telephone 202-473-2583, fax 202522-0054, email address csanchezparamo@worldbank.org. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. January 2002. (60 pages)

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