UNEMPLOYMENT BENEFITS: TRAP OR BRIDGE?
EVIDENCE FROM THE DUTCH EXPERIMENT
Impossibly strict restrictions on the level of unemployment benefits and the period for which they are available discourage vulnerable workers from seeking to escape unemployment, ironically forcing them back into a ‘trap’ of long-term social security benefits. That is the one of the conclusions of new research by Irma Mooi-Reçi and Melinda Mills.
They conclude that active labour market policies should therefore place more attention on stimulating the re-entry of those who are disadvantaged and not eligible for unemployment benefits as opposed to finding new ways to exclude them.
Many industrialised countries have been confronted with soaring unemployment rates, long-term unemployment and unsustainable unemployment benefit payments. This has prompted politicians and policy-makers to ask how they can reduce benefit payments and get the long-term unemployed back to work.
Some argue that benefits are a ‘trap’ or disincentive for the unemployed to seek employment. Whereas others have found that benefits serve as a ‘bridge’ or search subsidy to help workers find a better job match and higher earnings in the longer-term.
A deep restructuring of the unemployment benefit system in many Western European countries such as the Netherlands succeeded in drastically reducing beneficiaries. Over the past two decades, the Netherlands engaged in a series of unprecedented benefit ‘experiments’ that specifically targeted the long-term unemployed via the reduction of the level, duration and eligibility of payments.
This study examines the effectiveness of this experiment by empirically examining how these reforms affected the job search incentives and disincentives of different unemployed groups in the Netherlands over a 15-year period.
Central findings demonstrate that increasingly stringent eligibility requirements and reductions in benefit levels and duration resulted in a two-tiered division of the unemployed of those who: 1) qualified for the higher and longer-term salary-related benefits, and, 2) became ineligible or faced highly restrictive job search periods.
In essence, these reforms helped the rich get richer and the poor get poorer. For the first group, who were often men with more resources or education, the reforms both extended their search period and in some cases even resulted in higher payouts.
For the second group, often women or those with more fragmented job careers, it became impossible to the meet the eligibility criteria. The result was that this group became discouraged after the exhaustion of their benefits and left the labour market entirely or re-entered the labour market rapidly at the expense of a suitable job match.
The results also highlight that incentives to leave unemployment are dynamic, with exit rates higher near the end of the exhaustion of the benefit period. Moreover, the findings demonstrate that extensions of the base and qualifying period during more prosperous economic periods, worked as a disincentive to look for work for the higher earning long-term male beneficiaries, but prompted the lower earning female recipients to enter more rapidly. When benefits were reduced, all groups entered employment more rapidly, but whether this was at the expense of a suitable job match remains to be seen.
The implications of these results and the empirical techniques that were used are applicable to a much broader audience beyond the Netherlands. This study provides evidence-based research for future policy-making on unemployment benefits.
First, considering the rush to employment around the end of the benefit period, we propose a flexible payment that would drop from higher to lower receipts over the unemployment duration. The study also uncovered how benefit reforms can produce a two-tiered system that reinforces inequality in societies.
A second proposal is to create a more optimal benefit design that takes into consideration the diversity of its recipients, particularly in relation to gender and eligibility differences. Women, youth and immigrants, who are relative newcomers to the labour market or have fragmented careers, are punished by restrictive week and year qualifying period requirements.
The Dutch policy experiment operated to reinforce and widen the extremes of inequality, by providing even more advantages to the already well-off group of mid-career men. We propose that reforms should be ‘tailored’ and ‘targeted’ to match the diverse needs and (un)employment histories of diverse groups instead of blanket reforms that often only serve the mainstream and classic labour market experiences of generally men’s employment.
Finally, impossibly strict restrictions in the benefit level and period discourage vulnerable workers to escape unemployment, ironically forcing them back into a ‘trap’ of long-term social security benefits. Active labour market policies should therefore place more attention on stimulating the re-entry of those who are disadvantaged and not eligible for UI benefits as opposed to finding new ways to exclude them.
ENDS
Notes for editors: ‘Unemployment Insurance Benefits – Trap or Bridge?
Longitudinal evidence from the Netherlands 1985-2000’ by Irma Mooi-Reçi and Melinda Mills was presented at the Royal Economic Society’s 2007 annual conference at the University of Warwick, 11-13 April.
Irma Mooi-Reçi is at the Vrije Universiteit, the Netherlands.
Melinda Mills is at the University of Groningen, the Netherlands.
For further information: contact Romesh Vaitilingam on 07768-661095 (email: ).