Unemployment Insurance with Policy Differentiation in Age and Contribution Time

Policies differentiating coverage generosity based on the beneficiary's age and contribution time are ubiquitous in social insurance, yet they vary considerably. The paper presented in this ZEW Research Seminar studies such differentiation in the context of unemployment insurance (UI). The authors provide a general sufficient statistics framework to assess the insurance-incentives trade-off from differentiating the duration of benefits. Their empirical implementation evaluates how workers' responses to UI, and the welfare effects, vary with age and contribution time. The authors exploit numerous discontinuities in benefit duration in Germany to obtain a comprehensive set of elasticities. They find that workers with stable employment in the last three years exhibit substantially smaller duration responses to UI extensions, resulting in a reduced fiscal externality. The authors find no significant response heterogeneity in age or longer contribution time horizons within their sample aged 40 to 55. They weigh this against the insurance value of UI to locally evaluate the optimality of the four benefit duration schedules that existed in Germany between 1994 and 2016. The authors document that steepening the duration of benefits in contribution time over a shorter horizon, and flattening it in age, would have increased welfare. Their results support policies that tag coverage on short-term contribution time to mitigate moral hazard.