Can unemployment benefit cuts improve employment and earnings?

Abstract

We study how a reduction of potential benefit duration (PBD) affects employment and earnings of job seekers before and after unemployment benefits exhaust.Reducing PBD induces job seekers to become less selective and accept jobs earlier, which can worsen or improve labor market outcomes. We study a 2003 reform that reduces PBD from 24 months to 18 months for job seekers younger than 55 years in Switzerland. Using older job seekers as a control group, we find that reducing PBD increases employment and earnings even after unemployment benefits have run out. Employment and earnings increase particularly strongly for job seekers who previously worked in industries with high R&D expenditures, industries where job seekers' skills can depreciate rapidly.

The labor market in Switzerland, 2000–2018

“…For Switzerland, the long-term unemployment rate was stable at around 30% throughout the 1990s before rising by 10% between 2001 and 2005. Despite Swiss labor market reforms in 2003 [1] and 2011 [2], which incentivized early return to work by reducing possible benefit duration for certain groups, the long-term unemployment rate never recovered and exceeded the OECD average of 29% in 2018.…”

Unemployment Benefit Duration and Startup Success

“…The DiD approach exploits reform-induced changes in the PBD (similar to Cottier et al, 2019) with the equation:…”

Unemployment Insurance with Response Heterogeneity

“…See Appendix A for an overview of the key studies using RD designs, e.g.,Card et al (2007a);Lalive (2008);Schmieder et al (2012);Caliendo et al (2013); LeBarbanchon (2016);;Nekoei and Weber (2017) andJohnston and Mas (2018). Other recent studies using alternative identification strategies include, e.g.,Lalive et al (2006);van Ours and Vodopivec (2008);Card et al (2015);Cottier et al (2020) andLichter and Schiprowski (2021). SeeTatsiramos and van Ours (2014) and for reviews of the literature on UI effects.…”