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Extended unemployment benefits and early retirement: program complementarity and program substitution


Inderbitzin, Lukas; Staubli, Stefan; Zweimüller, Josef (2013). Extended unemployment benefits and early retirement: program complementarity and program substitution. Working paper series / Department of Economics 119, University of Zurich.

Abstract

This paper explores how extended unemployment insurance (UI) benefits targeted to older workers affect early retirement and social welfare. The trade-off of optimal UI between consumption smoothing and moral hazard requires accounting for the entire early retirement system, which often includes extended UI and relaxed access to disability insurance (DI). We argue that extended UI generates program complementarity (increased take-up of UI followed by DI and/or regular retirement benefits) and program substitution (increased take-up of UI instead of DI). Exploiting Austria's regional extended benefit program, which extended regular UI benefits to up to 4 years, we find: (i) program complementarity is quantitatively important for workers aged 50+; and (ii) program substitution is quantitatively relevant for workers aged 55+. We derive a simple rule for optimal UI that accounts for program complementarity and program substitution. Using the sufficient statistics approach, we conclude that UI for older workers was too generous and the regional extended benefit program was a suboptimal policy.

Abstract

This paper explores how extended unemployment insurance (UI) benefits targeted to older workers affect early retirement and social welfare. The trade-off of optimal UI between consumption smoothing and moral hazard requires accounting for the entire early retirement system, which often includes extended UI and relaxed access to disability insurance (DI). We argue that extended UI generates program complementarity (increased take-up of UI followed by DI and/or regular retirement benefits) and program substitution (increased take-up of UI instead of DI). Exploiting Austria's regional extended benefit program, which extended regular UI benefits to up to 4 years, we find: (i) program complementarity is quantitatively important for workers aged 50+; and (ii) program substitution is quantitatively relevant for workers aged 55+. We derive a simple rule for optimal UI that accounts for program complementarity and program substitution. Using the sufficient statistics approach, we conclude that UI for older workers was too generous and the regional extended benefit program was a suboptimal policy.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:J14, J26, J65
Uncontrolled Keywords:Early retirement, unemployment, disability, policy reform, optimal benefits
Language:English
Date:April 2013
Deposited On:16 Apr 2013 12:43
Last Modified:07 Dec 2017 21:01
Series Name:Working paper series / Department of Economics
Number of Pages:46
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp119.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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