Lump-sum severance grants and the duration of unemployment

Josefine Andersson ()
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Josefine Andersson: IFAU - Institute for Evaluation of Labour Market and Education Policy, Postal: Institute for Evaluation of Labour Market and Education Policy, P O Box 513, SE-751 20 Uppsala, Sweden

No 2018:23, Working Paper Series from IFAU - Institute for Evaluation of Labour Market and Education Policy

Abstract: The well-known positive relationship between the unemployment benefit level and unemployment duration can be separated into two potential sources; a moral hazard effect, and a liquidity effect pertaining to the increased ability to smooth consumption. The latter is a socially optimal response due to credit and insurance market failures. These two effects are difficult to separate empirically, but the social optimality of an unemployment insurance policy can be evaluated by studying the effect of a non-distortionary lump-sum severance grant on unemployment durations. In this study, I evaluate the effects on unemployment duration and subsequent job quality of a lump-sum severance grant provided to displaced workers, by means of a Swedish collective agreement. I use a regression discontinuity design, based on the strict age requirement to be eligible for the grant. I find that the lump-sum grant has a positive effect on the probability of becoming unemployed and the length of the completed unemployment duration, but no effect on subsequent job quality. My analysis also indicates that spousal income is important for the consumption smoothing abilities of displaced workers, and that the grant may have a greater effect in times of more favorable labor market conditions.

Keywords: Employment Security Agreements; collective agreement; lump-sum severance grant; unemployment insurance; moral hazard; liquidity effect; regression discontinuity design (search for similar items in EconPapers)
JEL-codes: J59 J63 J65 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2018-12-07
New Economics Papers: this item is included in nep-ias and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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