Unemployment Insurance Benefit Levels in Poland (6-Month Benefit Duration)

The net cost is expressed per unit of mechanical transfer: 1 for the higher benefits paid to existing claimants, plus the behavioral cost per unit of that transfer.

The behavioral cost has two channels: additional benefit payments, as more workers separate and claimants stay on benefits longer; and lost tax revenue and extra social assistance, as higher separations and longer spells shrink employment. The paper writes the ratio of behavioral to mechanical cost as

\frac{BC}{MC} = e\,\eta_{\delta,b} + \eta_{D_b,b} – \eta_{D,b}\,u + e\,\frac{\tau}{b}\,\frac{D}{D_b}\left(\eta_{\delta,b} + \eta_{D,b}\right)

where η_δ,b = 1.664 is the elasticity of separations with respect to the benefit level, from the inflow estimate; η_Db,b = 0.222 and η_D,b = 0.250 are the elasticities of benefit duration and unemployment duration; e = 0.92 and u = 0.08 are the shares of the workforce that are employed and unemployed; and D = 9.41 and D_b = 4.54 months are the average durations of unemployment and benefit receipt. The third term is negative: longer spells leave fewer employed workers to separate and start new claims.

The ratio τ/b compares what the government loses when a worker moves into unemployment with the UI premium over social assistance. Here τ is the worker’s tax payments plus the social assistance the government saves while that person works, and b is the UI benefit over and above social assistance. From tax and replacement-rate statistics for an average-wage worker (an average tax rate of 35 percent, and replacement rates of 41 percent with UI and social assistance and 21 percent with social assistance alone), the paper obtains τ/b = 3.72, against 1.31 if social assistance were ignored.

The behavioral cost is 15.30 per unit of mechanical transfer: 13.56 of lost tax revenue and 1.74 of additional benefit payments. Most of it comes from employed workers separating more often rather than from longer unemployment spells. The net cost is therefore 1 + 15.30 = 16.30.

Dividing willingness to pay by net cost gives an MVPF of 1.2346 / 16.30 = 0.08. The paper reports MVPFs for every combination of its three risk-aversion coefficients and two consumption losses without designating a headline; this figure uses its model with endogenous separations, a coefficient of 2, and the benchmark 10 percent loss. With a 10 percent loss, the MVPF is 0.07, 0.08, and 0.10 for coefficients of 1, 2, and 5; with a 30 percent loss, it is 0.09, 0.13, and 0.37.

Holding inflows into unemployment fixed, as in Schmieder and von Wachter (2016), the behavioral cost is 2.15 and the MVPF is 0.35, 0.39, and 0.54 with a 10 percent loss, and 0.45, 0.65, and 1.89 with a 30 percent loss. Counting the separations of employed workers multiplies the behavioral cost by about seven.

Even with high risk aversion, the MVPF stays far below one: the increase would be welfare-neutral only if benefit recipients consumed 75 percent less than employed workers with a risk-aversion coefficient of 2, or 43 percent less with a coefficient of 5. The MVPF is lower than for the same increase among claimants with 12 months of potential duration (0.11). The paper concludes that, once employed workers’ separations are counted, raising the benefit level is a far more costly way to make UI more generous than extending its duration, whose MVPF under the same assumptions is 0.27.