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ABSTRACT
This paper is an attempt to empirically investigate the macroeconomic effects of public policy on unemployment benefits. We address this issue by asking a simple question: How does public policy relating to unemployment benefits affect economic growth, productivity, and unemployment rate? We employ a dynamic panel VAR and perform a number of estimations, using data for several OECD countries. Overall, our results suggest that increases in unemployment benefits have both positive and adverse effects. In particular, we find that benefits generosity can increase output and productivity, but can also weakly raise unemployment rates in some cases. Our analysis in this paper calls into question the mainstream policy view of using reduction in unemployment benefits as a tool to improve macroeconomic outcomes.
Acknowledgements
The authors would like to thank Jesper Eriksen and the two anonymous reviewers for their constructive feedback.
Disclosure Statement
No potential conflict of interest was reported by the authors.
Notes
1 Brancaccio, De Cristofaro, and Giammetti (Citation2020) review a number of papers in this area, finding that amongst 53 academic papers published between 1990 and 2019, only 28 per cent support the ‘IMF–OECD consensus’ regarding labour market deregulations, while the remaining 72 per cent report results that are ambiguous or contrary to the consensus. Hence, the support for labour market deregulation has declined.
2 For theoretical contributions, see, e.g., Baily (Citation1978) and Hopenhayn and Nicolini (Citation1997). For empirical contributions, see Meyer (Citation1990), Scarpetta (Citation1996) and Howell and Azizoglu (Citation2011). For a survey, see Rogerson, Shimer, and Wright (Citation2005).
3 See, e.g., Diamond (Citation1982) and Shapiro and Stiglitz (Citation1984).
4 For a survey on search theory models, see Rogerson, Shimer, and Wright (Citation2005). Earlier surveys on search theory can be found in Lippman and McCall (Citation1976), Mortensen (Citation1986) and Mortensen and Pissarides (Citation1999).
5 Chetty (Citation2008) incorporates liquidity effects in the model and derives a formula determining the optimal level of UI. He argues that increases in periods of unemployment in response to UB are due not only to moral hazard but also liquidity effects. The findings in a recent study by Landais (Citation2015) also confirm Chetty’s argument that liquidity effects are vital, and can increase welfare.
6 The data for Sweden has missing observations for 2005 and 2006.
7 Our measure of NRR isolates UB and excludes the effect of all other forms of benefit.
8 These NRRs are calculated by taking averages across different family types for the sake of presentation.
9 Note that the sum of different unemployment spells for a given country in a given year equals aggregate unemployment rate in that year.
10 Before estimating the model, we perform a series of panel unit root tests on our data. We find evidence of a unit root in real GDP and productivity while unemployment rates and all measures of NRR are stationary at levels. We first difference the log of real GDP and productivity in order to create a stationary vector. We do not report these results to conserve space; however, the results are available upon request.
11 Unfortunately, the lack of data leads to this choice.
12 For GMM estimations, Andrews and Lu (Citation2001) proposed optimal moment and model selection criteria, which are based on Hansen’s (Citation1982) J-statistic of over-identifying restrictions.