The Potential Duration of Unemployment Benefits and the Duration of Unemployment

Abstract

Western European countries with relatively generous unemployment insurance (UI) systems (such as Belgium, France, Germany, the Netherlands, and the UK) have suffered much larger and more persistent increases in unemployment in the 1980s than has the USA. These differences in West European and US unemployment experience are largely explained by the substantially longer duration of unemployment spells in Europe. Furthermore, much microeconomic evidence indicates that there is a positive relation between the level of UI benefits received and the duration of the unemployment spells of UI recipients.² These observations have generated much interest among both academics (for example, Minford, 1985) and the press (for example The Economist, 14–20 May 1988, p. 69) in the hypothesis that work disincentives arising from generous unemployment insurance (UI) systems have played an important role in high and persistent European unemployment in the 1980s.

This paper represents a shortened version of our study ‘The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment’, Journal of Public Economics (1990) vol. 41, pp. 45–72, with the kind permission of Physical Sciences and Engineering Division, Elsevier Science Publishers. We thank Robert Moffitt for providing data and answering numerous questions. We are grateful to Gary Burtless, Dale Mortensen, Nick Stern, Lawrence Summers, and an anonymous referee for helpful comments. Financial support from the following sources is also gratefully acknowledged: National Science Foundation Grants SES 88-09200 (Katz) and SES 88-21721 (Meyer); an NBER Olin Fellowship in Economics (Katz); and the Industrial Relations Section at Princeton University (Meyer). The data used in this paper will be made available upon request.