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An Evaluation of Optimal Unemployment Insurance Using Two Natural Experiments

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An Evaluation of Optimal Unemployment Insurance Using

Two Natural Experiments

Po-Chun Huang Tzu-Ting Yang

National Chengchi University Academia Sinica

January 2, 2018

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Motivation

I Unemployment insurance (UI) benefit protects individuals against the risk of

earnings loss during unemployment

I But UI benefit also distorts incentives to search for jobs

I UI benefit increases unemployment duration through two distinct channels

(Chetty, 2008):

1 Moral hazard effect (welfare cost)

I More generous UI incentivizes people to keep unemployed to get UI benefits

2 Liquidity effect (welfare gain)

I More generous UI assist people with little saving to smooth their consumption

during unemployment

I Distinguishing liquidity effect from moral hazard effects has important

welfare implications

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

This Paper

Overview

I We disentangle the liquidity effect from the moral hazard effect using UI

administrative data and two natural experiments in Taiwan

1 Use discontinuity in eligibility for extended UI benefits to identify the

(total) effects of UI extension:

I Since 2009, UI recipients aged 45 or older at job loss are eligible for 9 months

(270 days) benefits, rather 6 months (180 days) for those under 45

2 Use the effect of reemployment bonus to identify the moral hazard effect

I Since 2003, UI recipients who find a job before exhausting benefits can

receive 50% of remaining benefits

I Reemployment bonus does not change the income stream during

unemployment so it does not have liquidity effect

I But it affects people’s incentive to keep unemployed

I Use variation in bonus offer around the time when bonus was introduced to

estimate the effects of reemployment bonus

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Institutional Background

I In Taiwan, job losers aged 15-65 with at least one year of work history in

the three years prior to layoff are eligible for UI benefits

1 Replacement rate

I 60% of recipients’ average monthly earnings during the 6 months prior to

layoff

2 Potential benefit duration

I Since 2009, the potential benefit duration has been 9 months (270 days) for

workers aged 45 or older at job loss, rather than 6 months (180 days) for those under 45

3 Reemployment bonus

I UI recipients can receive bonuses equal to 50% of remaining benefits, if they find jobs before benefit exhaustion and keep the job for at least three months

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Examples

I Claimant 1 is age 44 at job loss and Claimant 2 is age 45 at job loss

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Job Search: Static Version

I Consider a static search model in Chetty (2008).

J(s) = max

s (1− s)u(A + b) + su(A + w + r − τ) − g(s), where r = θb

I Optimal search satisfies:

u(ce)− u(cu) = g′(s)

I The effect of an increase in b is a combination of a liquidity effect (∂s

∂A) and

a moral hazard effect (∂s

∂w). ∂s ∂b = ∂s ∂A− (1 − θ) ∂s ∂w = ∂s ∂A− (1 − θ) ∂s ∂r

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Welfare: Static Version

I Social planner maximizes welfare by choosing b

W(b, θ) = max

b su(A + w + r− τ) + (1 − s)u(A + b) − g(s)

s.t.(1− s)b + sr = sτ;

I The welfare effect of increasing b depends on the relative size of

consumption smoothing benefits and increased unemployment.

dW db /u′(c e) = 1− s s [ u′(cu)− u′(ce) u′(ce) ϵ1−s,b s ]

I The ratio of the liquidity to moral hazard effect equals consumption

smoothing benefits. u′(cu)− u′(ce) u′(ce) = ∂s/∂A ∂s/∂w = ∂s/∂A ∂s/∂r 7 / 32

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Data

I UI claims and earnings records for the population of UI recipients in Taiwan

from 1999 to 2012

I Each observation contains

I date of job loss and date of birth

I insured duration of unemployment and nonemployment duration

I monthly earnings and some demographic information

I Sample for extended benefits: 20,906 UI recipients age 43 to 46 at job loss

between May 2009 and December 2012. (about 10% of all recipients)

I Sample for bonuses: 91,889 UI recipients between January 2002 and July

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Effect of UI Extension on Benefit Duration

Figure:Benefit Duration: 2009-2013

Figure:Benefit Duration: 2005-2008

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The Effect of UI Extension on Nonemployment Duration

Figure:Nonemployment Duration: 2009-2013

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Effect of UI Extension on Monthly Reemployment Hazard

1st-6th month

Figure: Monthly Reemployment Hazard (1st-6th month): 2009-2013

.04 .06 .08 .1 .12 .14

Average Remeployment Hazard in the First Six Months

40 42 44 46 48 50

Age at Job Loss

Figure:Nonemployment Duration: 2005-2008

.04

.06

.08

.1

.12

Average Remeployment Hazard in the First Six Months

40 42 44 46 48 50

Age at Job Loss

Density Covariates Placebo

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Estimate the Effect of UI Extension

Research Design: Regression Discontinuity Design

I To estimate the effect of UI extension, we conduct the following RD design:

yi = α + βEBAge45i+ f(ai) + vi

I yi: duration outcomes, reemployment hazard

I ai: ”age at job loss”

I Age45i= 1[ai≥ 45]

I f(ai): a polynomial function of ai interacted with Age45i

I We estimate this regression within specific age range 45− b < ai< 45 + b

I Bandwidth (b): optimal bandwidth proposed by Calonico, Cattaneo, and

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Estimation Results

The Effect of UI Extension

I The Effect of 90-day increase in UI benefits on benefit duration,

nonemployment duration and monthly reemployment hazard

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Estimate the Effect of Reemployment Bonus

Description of Bonus Treatment

I The reemployment bonus program reached back to UI recipients who were

receiving benefits when the program took effect in January 1, 2003

I Example: a worker starting UI spell on Nov. 1, 2002 found a job on Jan. 1,

2003 would receive two months of benefits a a bonus.

1 Cohorts starting UI spell before July 5th, 2002

I They were not eligible for reemployment bonus

2 Cohorts starting UI spells between July 5th, 2002 and December 31st, 2002

I They were partially exposed to the bonus program due to the reach back

provision

3 Cohorts starting UI spells after January 2003

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Estimate the Effect of Reemployment Bonus

Description of Bonus Treatment

0

90

180

Potential Reemployment Bonus

-360 -180 0 180 360

Number of Days from Jan. 1, 2003

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Average Reemployment Hazard and UI Starting Date

Figure:Monthly Reemployment Hazard from Jan. 2002 to July 2003

.07

.08

.09

.1

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Average Reemployment Hazard and UI Starting Date (Age 35-50)

Figure:Monthly Reemployment Hazard from Jan. 2002 to July 2003

.04 .05 .06 .07 .08 .09

Monthly Reemployment Rate in the First Six Months

−360 −300 −240 −180 −120 −60 0 60 120 180 Number of Days from Jan. 1, 2003

Figure:Monthly Reemployment Hazard from Jan. 2000 to July 2001

.04 .05 .06 .07 .08 .09

Monthly Reemployment Rate in the First Six Months

−360 −300 −240 −180 −120 −60 0 60 120 180 Number of Days from Jan. 1, 2001

Density Covariates

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Estimate the Effect of Reemployment Bonus

Research Design: Regression Kink Design

I We estimate the following hazard model:

him = α + γ(ti− c) + β(ti− c) · D

I him: the reemployment probability in month m + 1 given worker i was not

employed in month m

I t: the first date of benefits receipt

I c: the cutoff date

I D = 1[ti− c ≥ 0]

I Using kink 1, 180· β identifies the effect of a 90-day increase in benefits as

a bonus.

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Estimation Results

The Effect of Reemployment Bonus

I The effect of a reemployment bonus equivalent to 90 days of UI benefits on

monthly reemployment hazard (1st-6th month) for workers aged 35-50 at job loss

(20)

Liquidity Effect and Moral Hazard Effect

I To incorporate dynamics, we need to discount the moral hazard by

multiplying S(P) ∂st ∂P |{z} Total Effect = b∂st ∂At | {z } Liquidity Effect −(1 − θ)St+1(P) b ∂st ∂rt |{z}

Moral Hazard Effect

I Plug in the estimated effects of extended benefits and reemployment

bonuses

−0.017 = b∂s0

∂A0 − 0.5 · 0.6 · 0.020

I The liquidity effect explains 65% of the total effect of UI extension

I b ∂s0 ∂AP b∂s0 ∂P = 0.011/0.017 = 0.65

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusion

I We disentangle the liquidity effect from the moral hazard effect and

estimate the welfare effect of a UI extension

I Use UI administrative data and two natural experiments in Taiwan

I A 90-day increase in potential benefit duration

I increases benefit duration and nonemployment duration by 57 days (40%) and

41 days (15%)

I reduces reemployment hazard by 1.7 percentage points in the first six months.

I Eligibility for the reemployment bonus (90-day of benefits)

I increases reemployment hazard by about 2 percentage points for middle-aged

workers.

I We estimate that the liquidity effect accounts for 65% of the effect of

extended UI benefits.

I Our results suggest a marginal increase in potential benefit duration

improves welfare.

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Sufficient Statistic Approach - Chetty (2009)

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Sample 1

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Sample 2

Estimate the Effect of Reemployment Bonus

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RD—Density Test

back 250 300 350 400 450 500 550 600 Number of UI Spells

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RD—Smoothness of Observables

back 27 / 32

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RD—Predicted Nonemployment Duration

back 285 290 295 300 305 310

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RD—Smoothness of Observables

back   29 / 32

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Average Reemployment Hazard and UI Starting Date

After UI Benefits Exhaustion

Figure:Monthly Reemployment Hazard After Reform: 2002-2003

.04 .05 .06 .07 .08 .09

Monthly Reemployment Rate in the First Six Months

−360 −300 −240 −180 −120 −60 0 60 120 180 Number of Days from Jan. 1, 2003

Figure:Monthly Reemployment Hazard Before Reform: 2001-2002

.05

.06

.07

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RK—Density Test

back 2000 4000 6000 8000 Number of UI Spells −400 −200 0 200 400

Number of Days from Jan. 1, 2003

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RK—Smoothness of Observables

參考文獻

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