Extended Benefit-Entitlement Periods and the Duration of Unemployment in West-Germany

In the 1980s benefit-entitlement periods for older workers with long previous employment have been extended considerably in several steps. At the same time, income replacement ratios have been slightly reduced for the unemployed without children, and the criteria of what is considered a "suitable" job by the labor office have been tightened. There have been some attempts to estimate the effect of the unemployment compensation system on the duration of unemployment, but the results of these studies differ with respect to the effects of the entitlement to and the level of unemployment benfits on individual unemployment durations. This paper analyzes these effects within a more general model, where the main focus is on the disincentive effects of the successive extension of benefit entitlement periods in the eighties.The results of the econometric analysis show that the entitlement to unemployment benefits increases the duration of unemployment for males, but has very little effect for females. The prolongation of entitlement periods and its extension to successively younger age groups in the eighties has thus increased unemployment durations for males. However, whether or not unemployment assistance is available after unemployment benefits are exhausted is much more important for male long-term unemployment than these benefit-entitlement effects. For females, benefit-entitlement in general seems to have little effect on the duration of unemployment. Although we have found supportive evidence for the hypothesis of female "wait unemployment", this effect has little impact on the duration of unemployment because of the very low level of the female out-of-the-labor-force hazard rate. Estimation results also show that marginal reductions of income-replacement ratios have very little effect on both male and female unemployment behavior.The increases in the minimum age for prolonged benefit-entitlement stipulated by the recent reform of the unemployment compensation system should lead to some reduction in the duration of unemployment for older males. On the other hand, there is little reason to believe that the reductions in benefit levels already enacted in the past have had substantial effects on individual re-employment probabilities. The stiffer criteria for what is considered a "suitable job" may in effect even increase the individually perceived income-replacement ratio. Furthermore, these criteria may also discourage efficient job search and thus lead to allocative inefficiency in the labor market. I conclude that further reform of the unemployment assistance scheme which is still open-ended in principle and, although means-tested, related to previous earnings seems required if long-term unemployment is to be reduced significantly.

Steiner, Viktor (1997), Extended Benefit-Entitlement Periods and the Duration of Unemployment in West-Germany, ZEW Discussion Paper Nr. 97-14, Mannheim.