Unemployment Traps : Do Financial Disincentives Matter?

This paper analyzes the importance of financial disincentives for workers in Denmark. Based on a panel survey which is merged to a number of administrative registers it is possible to calculate precise measures of the economic incentives for labor force participants between employment in a full time job and being on unemployment insurance benefits and considering also the fixed costs of work. The results indicate large disincentives effects for some groups, especially low paid women. In 1996, 6 percent of Danish men and 13 percent of the women had a lower disposable net income if working in a full-time job compared to being on unemployment benefits. The effect of these financial disincentives is analyzed in simple reduced form models of on-the-job search, unemployed search behavior, unemployment risk, and transitions out of the labor force. We find that the net compensation rate in unemployment has a significant impact on women's propensity to leave the labor force, on measures of search intensity, on the risk of being hit by unemployment and on one of our flexibility measures, i.e., the maximum acceptable commuting time to a job. The net compensation rate has no impact on the willingness to move to another place to get a job. However, here we find a significant impact from job attitude related measures. We end the paper reporting the results from including attitude variables along with economic variables. We find a number of significant effects from attitude variables. However, the main conclusion is that economic incentives dominate the present analysis of unemployment traps