The (dis)incentive effects of unemployment security are often regarded as self-evident. However, there have been few studies about them at least in Finland. In this paper, a research project concerning the incentive effects of unemployment insurance (UI) benefit exhaustion is presented. If the UI benefit were to have massive disincentive effects, we should be able to observe them when studying exit from unemployment before and after benefit exhaustion. In the Finnish system, people will be moved to a usually considerably lower flat-rate benefit, if they do not re-qualify for UI during 500 working days (700 calendar days) of unemployment. We call this an 'incentive step' in the system. With detailed longitudinal register data (N=350 000) we are able to study the effects of the step also when the person exits unemployment for a while but re-enters without qualifying for a new UI period. The study includes people entering unemployment during the years 1995-98. We have been able to follow their labour market career until the end of 2002. The results show an increase in the probability to exit unemployment around the time of the incentive step, indicating that some individuals have delayed their exit from unemployment because of economic incentives. The magnitude of the effect is small, however, and we conclude that incentives are not likely to be a major issue behind prolonged unemployment in the Finnish system.
Financed by the National Centre for Research and Development under grant No. SP/I/1/77065/10 by the strategic scientific research and experimental development program:
SYNAT - “Interdisciplinary System for Interactive Scientific and Scientific-Technical Information”.