SIX WAYS TO LEAVE UNEMPLOYMENT
| Published date | 01 September 2008 |
| DOI | http://doi.org/10.1111/j.1467-9485.2008.00459.x |
| Author | Pedro Portugal,John T. Addison |
| Date | 01 September 2008 |
SIX WAYS TO LEAVE UNEMPLOYMENT
Pedro Portugal
n
and John T. Addison
nn
Abstract
This paper uses a unique Portuguese dataset to examine the effect of access to
unemployment benefits (UBs) and their maximum potential duration on escape
rates from unemployment. In examining the time profile of transitions out of
unemployment, the principal contributions of the paper are twofold. First, it
provides a detailed state space of potential outcomes: open-ended employment,
fixed-term contracts, part-time work, government-provided jobs, self employment,
and labour force withdrawal. Second, it is able to exploit major exogenous
discontinuities in the maximum duration of unemployment benefits to identify
disincentive effects. While confirming strong disincentive effects, it is shown that
use of an aggregate hazard function regression model compounds very different and
even contradictory effects of the determinants of unemployment.
I Intro ductio n
This paper offers an examination of the impact of access to unemployment
benefits on unemployment duration in Portugal. The effect of subsidization of
the search process on jobless duration is of course familiar territory, and so the
present treatment seeks to extend the conventional analysis in two main ways.
First, it allows for time-varying effects of unemployment insurance benefits on
jobless duration, as suggested by both the labourleisure and job search models.
For reasons given below, our concern here is with the more potent benefit
duration argument than with (changes in) replacement rates. Now the effects of
potential benefit duration in influencing the pattern of exit rates from
unemployment – a reduction in escape rates with extended benefits and a sharp
increase in escape rates at benefit exhaustion – have been recognized in a
growing literature, the newer variants of which focus on endogenous policy bias
because all such studies exploit changes in unemployment rules over time or
across jurisdictions (e.g. Card and Levine, 2000; Lalive and Zweimu
¨ller, 2004;
Lalive et al., 2006; Van Ours and Vodopivec, 2006).
1
Here, the distinctive feature
of our analysis is that we are able to exploit large and exogenous discontinuities
n
Banco de Portugal and Universidade Nova de Lisboa
nn
Queen’s University Belfast and IZA Bonn
1
For the previous literature, see Katz and Meyer (1990), Meyer (1990), Fallick (1991),
Narandranathan and Stewart (1993a), and Belzil (1995).
Scottish Journal of Political Economy, Vol. 55, No. 4, September 2008
r2008 The Authors
Journal compilation r2008 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
393
in maximum potential benefit duration reflecting rules on entitlement that are
exclusively a function of age.
The second and more original contribution of the present paper is that it
allows for an array of exit options open to the unemployed individual. First of
all, the role of destination state is less often encountered in duration analysis.
Second of all, although the sparse literature has recognized that unemployment
and inactivity are behaviourally distinct states (see Flinn and Heckman, 1983;
Jones and Riddell, 1999; Addison and Portugal, 2003), it has generally failed to
draw distinctions between different types of employment. The principal
exception concerns the distinction between full-time and part-time jobs
(Narandranathan and Stewart, 1993b; McCall, 1996). To our knowledge, there
has been no attempt to investigate whether or not access to benefits in practice
serves to mediate between these different routes to re-employment.
From a European perspective, it is germane to distinguish between open-
ended or regular contracts of employment and fixed-term contracts. This is
because the latter have tended to be the main means of circumventing ambitious
employment protection rules. The classic example is of course Spain where fixed-
term contracts constitute 35% of all dependent employment and around 90% of
all new contracts (Bover et al., 2000). Fixed-term contracts perform the function
of a labour buffer stock and, to complicate matters, also serve as a screening
mechanism for inducting workers into open-ended employment (Vareja
˜o and
Portugal, 2005, 2007). Another distinction worth pursuing in a European
context (especially relevant in Mediterranean or southern European nations) is
the option of self-employment, again for reasons having to do with differential
(i.e. more sweeping) employment protection legislation (see OECD, 1999).
Finally, jobs provided through the public employment service are a more
important exit option in Europe than in, say, the United States because of the
greater emphasis placed on active labour market policies in the former region.
And, although fixed term in nature, publicly provided jobs should not be
uncritically lumped together with the generality of fixed-term contracts. For all
these reasons, a more realistic characterization of the European experience
implies the identification of multiple destination states (see Bonnal et al., 1997;
Røed and Raaum, 2006). In addition to labour market withdrawal and part-
time employment, we will consider open-ended employment, fixed-term
contracts, government-provided jobs, and self-employment.
If individuals do indeed choose between a number of re-employment options
(and inactivity), there are several sources of aggregation bias attached to
estimations based on an aggregate hazard function regression model. First, and
most obviously, if individuals attach different utilities to the various alternatives
to unemployment, regression effects may differ markedly across destinations.
Thus, to take unemployment insurance as a case in point, access to benefits can
materially influence the choice of destination state because the variable will enter
as a negative (and possibly time-varying) cost in the individual utility function.
More concretely, if the individual is drawing benefits in a regime that does not
allow benefits to be paid in conjunction with part-time employment, it is unlikely
that we will observe transitions into such employment before the point of benefit
P. PORTUGAL AND J. T. ADDISON394
r2008 The Authors
Journal compilation r2008 Scottish Economic Society
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