THE DESIGN OF UNEMPLOYMENT TRANSFERS:EVIDENCE FROM A DYNAMIC STRUCTURAL LIFECYCLEMODEL

In this paper we use a dynamic structural life-cycle model to analyze the employment,fiscal and welfare effects induced by unemployment insurance. The model features a detailedspecification of the tax and transfer system, including unemployment insurance benefitswhich depend on an individual's employment and earnings history. The model also capturesthe endogenous accumulation of experience which impacts on future wages, job arrivals andjob separations. For better identification of the structural parameters we exploit a quasi-natural experiment, namely reductions over time in the entitlement period for unemploymentinsurance benefits which varied by age and experience. The results show that a policy cut inthe generosity of unemployment insurance operationalized as a reduction in the entitlementperiod generates a larger increase in employment and yields a bigger fiscal saving than a cutoperationalized as a reduction in the replacement ratio. Welfare analysis of revenue neutraltax and transfer reforms also favors a reduction in the entitlement period...