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Reducing unemployment benefit duration to increase job-finding rates
- Authors: Trine Filges, Anders Bruun Jonassen, Anne-Marie Klint Jørgensen
- Published date: 2018-02-28
- Coordinating group(s): Social Welfare
- Type of document: Title, Protocol, Review, Plain language summary
- PLS Title: Reducing the maximum duration of unemployment benefits increases the job finding rate of the unemployed
- PLS Logo:
- PLS Description: Policymakers may wish to reduce the generosity of the unemployment benefits system in order to reduce unemployment levels. Reducing benefit levels may be politically more difficult than shortening the length of the unemployment benefit eligibility period to create work incentives for the unemployed. This review summarizes studies that measure the effects of shortening the maximum duration of unemployment benefit entitlement on job finding rates.
- Title: Reducing unemployment benefit duration to increase job-finding rates
- See the full review: https://onlinelibrary.wiley.com/doi/10.4073/csr.2018.2
About this systematic review
Reducing the maximum duration of unemployment benefits is one strategy used to reduce unemployment. Evidence from seven studies confirms such an effect. However, the effect is small and more studies of higher quality are needed to give more detailed findings to inform policy.
What are the main results?
Reducing the duration of unemployment benefits increases the exit rate from unemployment. Data from seven studies show that the exit rate from unemployment for those with reduced duration of benefit entitlement on average is 10%. This corresponds to a 52% chance that those with reduced duration will find a job before an unemployed person with the existing, longer duration (no effect corresponds to a 50% chance).
There is not enough evidence to determine effects on the exit rate from re-employment or on the wage rate in the job found. There are insufficient high-quality studies to allow an examination of variation of effects.
Unemployment benefit programmes protect individuals against loss of income and provide unemployed individuals with the possibility of finding a better match between their qualifications and job vacancies. However, unemployment benefits may also distort incentives by subsidizing long and unproductive job searches. To reduce unemployment levels, policymakers may wish to reduce the generosity of the unemployment system. While it may be politically intractable to lower the monetary amount of unemployment benefits available, the length of the unemployment benefit eligibility period is often used as a political instrument to create work incentives for the unemployed. If a shorter benefit period results in a significantly increased incentive for finding work, shortening the benefit eligibility period may reduce the share of long and unproductive job searches and thereby decrease the overall unemployment level.
The purpose of this review is to systematically uncover relevant studies in the literature that measure the effects of shortening the maximum duration of unemployment benefit entitlement on job finding rates, and to synthesize the effects in a transparent manner. As a secondary objective we will, where possible, investigate the extent to which the effects differ among different groups of unemployed people, such as those with high/low levels of education or men/women, and further explore from which point in the unemployment spell unemployed individuals react to the length of benefit entitlement.
The search was concluded in March 2016. Relevant studies were identified through electronic searches of bibliographic databases, government policy databanks, internet search engines and hand searching of core journals. We searched to identify both published and unpublished literature. The searches were international in scope. Reference lists of included studies and relevant reviews were also searched.
The intervention of interest was a reduction (change) in the maximum duration of entitlement of any kind of unemployment benefits. We included unemployed individuals who received any type of time-limited benefit during their unemployment spell. All study designs that used a well-defined control group were eligible for inclusion in this review. Studies that utilised qualitative approaches were not included in the review due to the absence of adequate control group conditions.
Data collection and analysis
Random effects models were used to pool data across the studies. We used the point estimate of the hazard ratio. Pooled estimates were weighted with inverse variance methods, and 95% confidence intervals were used. A sensitivity analysis was performed to evaluate whether the pooled effect sizes were robust across components of methodological quality, in relation to the quality of data and whether the study analysed an extension of entitlement duration.
The initial search for potentially relevant studies resulted in a total number of 34,930 hits. A total of 41 studies, consisting of 66 papers, from 15 different countries, met the inclusion criteria and were vetted by the review authors. Only 38 studies provided data that permitted the calculation of an effect size for the primary outcome. Of these 38 studies, 28 studies could not be used in the data synthesis due to a too high risk of bias. A further 3 studies could not be used in the data synthesis due to overlapping of data samples. As a result, only 7 studies were included in the data synthesis and one of these studies only provided results on the secondary outcome. In total, 6 studies provided data that permitted the calculation of an effect size for the primary outcome and 3 studies provided data that permitted the calculation of secondary outcome. The sample size used in the studies ranged from 5,017 spells of unemployment to 509,355 spells. The total number of unemployment spells was 1,154,090, implying an average sample size of 164,870 spells of unemployment per study.
The seven studies covered Austria, France, Germany and Slovenia. There was a high degree of variation in maximum entitlement, ranging between 26 and 209 weeks. On average the studies analysed a reduction of 43 weeks in maximum entitlement; the smallest being a reduction of 9 weeks and the largest a reduction of 179 weeks. Four studies restricted the analysis to a specific age group and three studies restricted the analysis to specific work experience levels. All studies used non-randomised designs. In the majority of studies the risk of bias was high.
This review found a statistically significant effect of shortening the maximum duration of unemployment benefit entitlement. The overall impact of shortening the maximum duration of unemployment benefit entitlement, obtained using hazard ratios, was estimated at 1.10 (95% CI 1.03 to 1.17, p=0.0005), which translates into an increase of approximately 10% in the exit rate from unemployment into employment and corresponds to a 52% chance that a treated unemployed person will find a job before a non-treated unemployed person.
Thus, although small, the available evidence associated with a sufficiently low risk of bias supports the hypothesis of an incentive effect of shortening the maximum duration of unemployment benefit entitlement. There was a lack of evidence to conclude that shortening the maximum duration of unemployment benefit entitlement has an impact on the quality of the job obtained.
Only three studies provided data on the exit rate from re-employment and three studies provided data on the log wage ratio in the re-employment job.
The overall impact of shortening the maximum duration of unemployment benefit entitlement on the exit rate from the re-employment job, obtained using hazard ratios, was 0.99 (95% CI 0.97 to 1.02, p=0.64) and the overall wage ratio was 1.00 (95% CI 0.99 to 1.01, p=0.089).
We did not find any adverse effects.
Sensitivity analyses resulted in no appreciable change in effect size, suggesting that the results are robust. The limited number of studies used in the meta-analysis should, however, be considered when interpreting the results.
Due to having an insufficient number of studies available for moderator analysis to be performed, it was not possible to examine whether the effect of reducing the maximum potential benefit duration on job-finding differs for men and women, for particular age groups or educational groups, or if factors such as good or bad labour market conditions, the type of unemployment benefit, the availability of alternative benefits, or whether compulsory activation is part of the institutional system, have an impact on the effect.
To the best of our knowledge, this is the first systematic review analysing the magnitude of the effect of shortening the maximum duration of unemployment benefit entitlement on the job finding rate. The review finds a surprisingly low number of studies with a sufficiently low risk of bias to enter a synthesis of the effect size of shortening the maximum duration of unemployment benefit entitlement. On the basis of this limited number of studies, shortening the maximum duration of unemployment benefit entitlement displays a limited potential for altering the employment prospects of the unemployed individuals. The available evidence does suggest an effect on the job finding rate of shortening the maximum duration of unemployment benefit entitlement, but the effect is small. Further, whether unemployed workers responding to a shorter potential benefit entitlement may be worse off, in the sense that they accept “lower quality”” jobs, has not yet been fully investigated.
The number of studies used in the data synthesis (7) is relatively low compared to the large number of studies (41) meeting the inclusion criteria for the review. The reduction in studies eligible for inclusion in the data synthesis was primarily caused by a judgment of too high a risk of bias. Thus, the process of excluding studies with too high risk of bias from the meta-analysis applied in this review left us with only seven studies to synthesize. This is a finding in its own right, entailing important information for stakeholders on the degree of confidence to place on the expected gains from changing the maximum potential unemployment benefit duration; fewer studies with too high risk of bias would have provided a more robust literature on which to base conclusions. There is a need for future studies to more thoroughly discuss the identifying assumptions of the study design and justify the choice of method by considering and reporting all relevant data and tests. Further, future studies should rely on data where all relevant information is available, in particular information on whether eligible individuals actually received unemployment benefits and information on individual maximum entitlement duration.