Unemployment Insurance in Taiwan
Introduction
Unemployment insurance (UI) protects individuals from the risk of earnings loss during unemployment, but it also distorts incentives to search for jobs. Huang and Yang (2021) use administrative data on the universe of unemployment spells in Taiwain between 2001 and 2011 to investigate the welfare effects of extending unemployment benefits. The paper calculates the MVPF of extending UI by three months (90 days) in a unique setting where people are eligible for unemployment benefits when unemployed and a re-employment bonus when they secure a job.
The paper compares the search effort responses to income transfers when employed (i.e., a re-employment bonus) and unemployed (i.e., extended benefits). To identify search effort responses to income transfers when employed, the paper exploits kinks in a 2003 employment bonus program in Taiwan. The program introduced re-employment bonuses whereby people would be paid 50% of their remaining UI benefits after regaining employment. To identify search effort responses to income transfers when unemployed, the paper exploits an age cutoff in a 2009 unemployment program in Taiwan. Under the new unemployment program, workers who lost their jobs when aged 45 or over became eligible for 9 months of UI benefits instead of the 6 months offered to those under 45. The paper finds that the provision of re-employment bonus increases monthly re-employment while extending unemployment benefits reduces the rate of exit from unemployment.
MVPF = 2.0
Net Cost
The net cost of an additional NTD of government spending on UI is 1+FE, where 1 is the mechanical cost and FE is the fiscal externality. The fiscal externality results from the impact of changes in UI benefits on employment duration. The paper finds that extending unemployment benefits by three months (90 days) increases benefit duration by 57 days and the time spent unemployed by 37 days. Based on these findings, the authors estimate that the behavioral cost per NTD of government spending on the UI extension is about $0.07.
The net cost of additional spending on UI is therefore 1 NTD + 0.07 NTD = 1.07 NTD.
Willingness to Pay
The willingness to pay for the extension of unemployment insurance has two components: (1) the willingness to pay for the extended unemployment insurance, and (2) the willingness to pay for the re-employment bonus.
This estimate is almost, but not quite, equal to the sum of transfers as a result of extended unemployment insurance (a) and transfers as a result of the re-employment bonus (b).
(1) The paper estimates the willingness to pay for extended unemployment insurance as the share of total transfers that are the result of extended UI (a/(a+b)) multiplied by the marginal rate of substitution between consumption in the employed and unemployed states (i.e., how willing a worker is to move income from an employed to unemployed state in order to smooth their consumption). The paper estimates a/(a+b) as 0.77 and the marginal rate of substitution between consumption in the employed and unemployed states as 2.5. The willingness to pay for the extended unemployment insurance is therefore estimated as 0.77 * 2.5 = 1.92.
(2) The paper estimates the willingness to pay for the re-employment bonus as the share of total transfers that are the result of the re-employment bonus (b/(a+b)). This is equal to 0.23. Note, the paper assumes that the income transfer when re-employed does not offer additional consumption-smoothing value.
The total willingness to pay is then 1.92 NTD + 0.23 NTD = 2.15 NTD.
MVPF Summary
The marginal value of public fund is therefore 2.15 NTD/ 1.07 NTD = 2.01.
In an appendix, the paper accounts for the incomplete take-up of bonuses and estimates an MVPF of 1.33. In another appendix, the paper estimates the MVPF of extending the bonus qualification period to be 2.56.
References
Po-Chun Huang and Tzu-Ting Yang (2021). “The Welfare Effects of Extending Unemployment Benefits: Evidence from Re-Employment and Unemployment Transfers.” Journal of Public Economics, 202: 104500. https://doi.org/10.1016/j.jpubeco.2021.104500
Policy Features
- Category
- Social Insurance
- Sub-Category
- Unemp. Ins.
- Beneficiary Type(s)
- Adults
- Average Age
- 39
- Country of Implementation
- Taiwan
- Empirical Method
- Regression Discontinuity
- Research Type
- Primary
- Peer Reviewed
- No
- MVPF Publication Link
- www.sciencedirect.com/science/article/pii/S0047272721001365