Unemployment benefit exhaustion: incentive effects on job-finding rates

Additional Info

  • Authors: Trine Filges, Lars Pico Geerdsen, Anne-Sofie Due Knudsen, Anne-Marie Klint Jorgensen, Krystyna Kowalski
  • Published date: 2013-03-01
  • Coordinating group(s): Social Welfare
  • Type of document: Title, Protocol, Review
  • Volume: 9
  • Issue nr: 4
  • Title: Unemployment benefit exhaustion: incentive effects on job-finding rates
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Background

In order to reduce unemployment levels, policymakers may wish to reduce the generosity of the unemployment system. While it may be politically intractable to lower the amount of unemployment benefits, the length of the unemployment benefit eligibility period is often used as a political instrument to create work incentives for the unemployed. If the prospect of exhaustion of unemployment benefits results in a significantly increased incentive for finding work, shortening the benefit eligibility period may reduce the share of long and unproductive job searches and thereby decrease the overall unemployment level.

Objectives

The primary objective of this systematic review was to study the impact of exhaustion of unemployment benefits. The primary outcome was unemployed individuals’ exit rate out of unemployment and into employment prior to benefit exhaustion or shortly thereafter. To determine if benefit expiration was associated with poor job matches, the secondary outcome of exit rate from the re-employment job was also explored.

Search strategy

Relevant studies were identified through electronic searches of bibliographic databases, government policy databanks, Internet search engines, and hand searching of core journals. We searched to identify both published and unpublished literature. The searches were international in scope. Overall, 23,991 references were screened, 454 full text reports were retrieved, and 47 studies were finally included. In addition to the general search, the reviewers have searched citations and reviews of related subjects.

Selection criteria

All study designs that used a well-defined control group were eligible for inclusion in this review. Studies that utilised qualitative approaches were not included in the review due to the absence of adequate control group conditions.

Data collection and analysis

The total number of potential relevant studies constituted 23,991 hits. A total of 47 studies, consisting of 65 papers, met the inclusion criteria and were vetted by the review authors. The final group of 47 studies were from 19 different countries. Only 21 studies provided data that permitted the calculation of an effect size for the primary outcome. Of these 21 studies, 4 studies could not be used in the data synthesis due to too high risk of bias, and a further 5 studies could not be used in the data synthesis due to overlap of data samples. Only 12 studies were therefore included in the data synthesis. Only 4 studies provided data that permitted the calculation of an effect size for the secondary outcome. Of these, 1 study could not be used in the data synthesis due to overlap of data samples.

Random effects models were used to pool data across the studies. We used the point estimate of the hazard ratio. Pooled estimates were weighted with inverse variance methods, and 95% confidence intervals were used. Subgroup analysis was used to examine the impact of gender. Sensitivity analysis was used to evaluate whether the pooled effect sizes were robust across components of methodological quality and in relation to the quality of data. Funnel plots were used to assess the possibility of publication bias.

Results

A statistically significant exhaustion effect in the month/week of benefit exhaustion was found. The effect estimate translates into an increase of approximately 80% in the exit rate from unemployment into employment. The increase in the exit rate starts even earlier: two months before benefits expire. The analysis revealed a statistically significant exhaustion effect one and two months before benefit exhaustion, though these effects were smaller than the effect in the month/week of exhaustion. The effect estimate one month before benefit exhaustion translates into a 30% increase in the exit rate from unemployment into employment. The effect estimate two months before benefit exhaustion translates into a 10% increase in the exit rate from unemployment into employment. No significant effects were found more than two months before exhaustion and no significant effects were found after benefits had expired. Thus, available evidence supports the hypothesis that there is an incentive effect of approaching benefit exhaustion but only shortly prior to exhaustion and at the time of exhaustion. The incentive effect is stronger at the time of exhaustion than one and two months before expiration. However, in all time periods, the hazard rate into employment increases from a low level. There was insufficient evidence to address whether the prospect of benefit exhaustion has an impact on the exit rate from the re-employment job. The results are robust in the sense that sensitivity analyses of the exhaustion effect evidenced no appreciable changes in the results. We found no strong indication of the presence of publication bias. We found no evidence to support the hypothesis that the exhaustion effect differs by gender. It was not possible to examine if the exhaustion effect differs for particular age or educational groups, or if factors such as good/bad labour market conditions, high/low initial maximum entitlement, availability of alternative benefits, and whether compulsory activation is part of the institutional system have an impact on the exhaustion effect.

Authors’ conclusions

In this review we have found clear evidence that the prospect of exhaustion of benefits results in a significantly increased incentive for finding work but only shortly (one and two months) prior to exhaustion and at the time of exhaustion. A significant benefit exhaustion effect is the result of a meta-analysis where we pooled measures from seven different European countries, the US, and Canada. Thus, the theoretical suggestion that the prospect of exhaustion of benefits results in a significantly increased incentive for finding work has been confirmed empirically by measures from a variety of countries. Hence, shortening the benefit eligibility period may reduce the share of long and unproductive job searches. Whether the increased job finding rate close to benefit expiration implies a significant decrease in the overall unemployment level depends on how quickly those who found a job return to unemployment. We found studies from three different countries, which provided data for re-employment exit rates. Based on this low number of studies, the evidence is inconclusive with respect to the hypothesis that the prospect of benefit exhaustion has an impact on the quality of the job measured as the exit rate of re-employment. Thus, whether the unemployed workers who are affected may actually be worse off than policy-makers intend them to be, in the sense that they accept “bad” jobs, has not yet been fully investigated. While additional research is needed, the findings of the current review support the hypothesis of an increased incentive for finding work as unemployment benefit exhaustion approaches.

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