The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden

Jonas Kolsrud, Camille Landais, Peter Nilsson (peter.nilsson@iies.su.se) and Johannes Spinnewijn (j.spinnewijn@lse.ac.uk)
Additional contact information
Peter Nilsson: IIES, Stockholm University
Johannes Spinnewijn: London School of Economics

No 9185, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper provides a simple, yet general framework to analyze the optimal time profile of benefits during the unemployment spell. We derive simple sufficient-statistics formulae capturing the insurance value and incentive costs of unemployment benefits paid at different times during the unemployment spell. Our general approach allows to revisit and evaluate in a transparent way the separate arguments for inclining or declining profiles put forward in the theoretical literature. We then estimate our sufficient statistics using administrative data on unemployment, income and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption determining the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. On average, savings and credit play a limited role in smoothing consumption. Our evidence therefore indicates that the recent change from a flat to a declining benefit profile in Sweden has decreased welfare. In fact, the local welfare gains push towards an increasing rather than decreasing benefit profile over the spell.

Keywords: sufficient statistics; dynamic policy; unemployment; consumption smoothing (search for similar items in EconPapers)
JEL-codes: H20 J64 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2015-07
New Economics Papers: this item is included in nep-lab and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published - published in: American Economic Review, 2018, 108 (4-5),985- 1033

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Related works:
Journal Article: The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden (2018)
Working Paper: The optimal timing of unemployment benefits: theory and evidence from Sweden (2018)
Working Paper: The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden (2015)
Working Paper: The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden (2015)
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