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Do unemployment benefits increase unemployment? New evidence on an old question

Author

Listed:
  • Fredriksson, Peter

    (Nationalekonomiska institutionen)

  • Söderström, Martin

    (Ministry of Finance, Government of Sweden)

Abstract
We examine the relationship between unemployment benefits and unemployment using Swedish regional data. To estimate the effect of an increase in unemployment insurance (UI) on unemployment we exploit the ceiling on UI benefits. The benefit ceiling, coupled with the fact that there are regional wage differentials, implies that the generosity of UI varies regionally. More importantly, the actual generosity of UI varies within region over time due to variations in the benefit ceiling. We find fairly robust evidence suggesting that the actual generosity of UI does matter for regional unemployment. Increases in the actual replacement rate contribute to higher unemployment as suggested by theory. We also show that removing the wage cap in UI benefit receipt would reduce the dispersion of regional unemployment. This result is due to the fact that low unemployment regions tend to be high wage regions where the benefit ceiling has a greater bite. Removing the benefit ceiling thus implies that the actual generosity of UI increases more in low unemployment regions.

Suggested Citation

  • Fredriksson, Peter & Söderström, Martin, 2008. "Do unemployment benefits increase unemployment? New evidence on an old question," Working Paper Series 2008:15, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    • Handle: RePEc:hhs:ifauwp:2008_015
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    References listed on IDEAS

    as
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    Cited by:

    1. Krebs, Tom & Scheffel, Martin, 2016. "Labor Market Institutions and the Cost of Recessions," IZA Discussion Papers 10442, Institute of Labor Economics (IZA).
    2. Enache Cosmin, 2013. "Adverse Incentive Effects of the Unemployment Benefit Level in Romania," Scientific Annals of Economics and Business, Sciendo, vol. 60(1), pages 54-66, July.
    3. Rettore, Enrico & Paggiaro, Adriano & Trivellato, Ugo, 2008. "The Effect of Extending the Duration of Eligibility in an Italian Labour Market Programme for Dismissed Workers," IZA Discussion Papers 3633, Institute of Labor Economics (IZA).
    4. Adriano Paggiaro & Enrico Rettore & Ugo Trivellato, 2009. "The Effect of a Longer Eligibility to a Labour Market Programme for Dismissed Workers," LABOUR, CEIS, vol. 23(1), pages 37-66, March.
    5. Mitman, Kurt & Rabinovich, Stanislav, 2015. "Optimal unemployment insurance in an equilibrium business-cycle model," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 99-118.
    6. Sjoquist, David & Wheeler, Laura, 2021. "Unemployment insurance claims and COVID-19," Journal of Economics and Business, Elsevier, vol. 115(C).

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    More about this item

    Keywords

    Unemployment; Unemployment insurance; Unemployment dispersion;
    All these keywords.

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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