Unemployment Compensation and High European Unemployment: A Reassessment with New Benefit Indicators

Posted: 1 Jun 2009

See all articles by David Howell

David Howell

The New School - Robert J. Milano Graduate School of Management & Urban Policy; Bard College - The Levy Economics Institute

Miriam Rehm

Independent

Date Written: Spring 2009

Abstract

Generous unemployment benefits lie at the heart of the conventional explanation for persistent high unemployment. The effects of benefit generosity on work incentives are more ambiguous in a broader behavioural framework in which workers get substantial disutility from unemployment (given income) and know that unemployment has scarring effects in the future. The micro evidence suggests modest effects of changes in generosity, but there are reasons to doubt that the impacts on national unemployment rates are consequential. The empirical case for the orthodox prediction comes from cross-country regressions on the OECD's gross replacement rate (GRR), but the published evidence is mixed, and we find little support in the pattern of annual changes in the GRR and the unemployment rate for OECD countries over the last three decades. We take advantage of new and much improved net replacement indicators from the OECD, which show little correlation with either the GRRs or with unemployment and employment rates. We conclude that the available evidence does not offer compelling support for the conventional view.

Keywords: unemployment, unemployment insurance, gross replacement rate, E24, J01, J21, J64, O57

Suggested Citation

Howell, David and Rehm, Miriam, Unemployment Compensation and High European Unemployment: A Reassessment with New Benefit Indicators (Spring 2009). Oxford Review of Economic Policy, Vol. 25, Issue 1, pp. 60-93, 2009, Available at SSRN: https://ssrn.com/abstract=1408423 or http://dx.doi.org/grp010

David Howell

The New School - Robert J. Milano Graduate School of Management & Urban Policy ( email )

New York, NY
United States
212-229-5434 (Phone)
212-229-5404 (Fax)

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504
United States

Miriam Rehm

Independent ( email )

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