Unemployment Insurance Duration Extensions in Portugal
Introduction
Unemployment insurance (UI) protects workers against the risk of lost earnings during a spell of unemployment, but a more generous system can also weaken the incentive to search for and accept a new job. The generosity of most UI systems is governed by two parameters: the level of benefits relative to previous earnings, and the potential benefit duration. Unemployment insurance systems are implemented widely in European Union countries, but the specific eligibility requirements and durations vary.
The Portuguese UI system has sharp cutoffs at age 30 and 40, above which UI benefit durations rise from 12 months to 18 months and 24 months respectively. Centeno and Novo (2009) use a regression discontinuity design and 1999-2002 Portuguese social-security data to estimate how the length of unemployment spells responds at each of these cutoffs.
Le Barbanchon et al. (2024) draw upon the estimates from Centeno and Novo (2009) to compute the MVPF of a marginal change to UI benefit duration in Portugal for workers at the age 40 cutoff whose potential benefit durations rose from 18 to 24 months. The calculation uses Schmieder and Von Wachter (2016) for a measure of the fiscal externality induced by the policy.
MVPF = 0.4
Net Cost
The net cost is estimated as $1 of additional UI benefit plus the fiscal externalities from reduced search effort for a new job. Reduced search effort means people will be covered by UI for longer, leading to more total UI payouts. In addition, longer periods of non-employment lead to a fiscal externality through reduced income taxes.
The paper uses a calculation from Schmieder and Von Wachter (2016) to get a fiscal externality of $2.16 and a net government cost of $3.16.
Willingness to Pay
The willingness to pay for $1 of additional UI benefits is estimated as
to capture that individuals are willing to pay more than $1 to the extent to which they are risk averse. This is measured by the coefficient of relative risk aversion, gamma, and the extent to which they experience a consumption drop upon unemployment. The paper assumes a coefficient of relative risk aversion of 4 and a 9% estimate of consumption drop at job loss from Kolsrud et al. (2018). This leads to a willingness to pay of $1 + 4*$0.09 = $1.36.
MVPF Summary
With a willingness to pay of $1.36 and a net government cost of $3.16, this leads to an MVPF of 0.43.
References
Centeno, Mário, Álvaro A. Novo (2009). “Reemployment wages and UI liquidity effect: a regression discontinuity approach.” Portuguese Economic Journal, 8:45–52. https://doi.org/10.1007/s10258-009-0038-8.
Kolsrud, Jonas, Camille Landais, Peter Nilsson, and Johannes Spinnewijn (2018). “The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden.” American Economic Review, 108(4-5): 985–1033. https://doi.org/10.1257/aer.20160816.
Le Barbanchon, Thomas, Johannes Schmieder, and Andrea Weber (2024).“Chapter 6 – Job search, unemployment insurance, and active labor market policies.” Handbook of Labor Economics, 5: 435-580. DOI: https://doi.org/10.1016/bs.heslab.2024.11.006.
Schmieder, Johannes F. and Till Von Wachter (2016). “The Effects of Unemployment Insurance Benefits: New Evidence and Interpretation.” Annual Review of Economics, 547-581. DOI: https://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080614-115758.
Policy Features
- Category
- Social Insurance
- Sub-Category
- Unemp. Ins.
- Beneficiary Type(s)
- Adults
- Country of Implementation
- Portugal
- Empirical Method
- Regression Discontinuity
- Research Type
- Secondary
- Peer Reviewed
- Yes
- MVPF Publication Link
- doi.org/10.1007/s10258-009-0038-8