PROTOCOL: Reducing Unemployment Benefit Duration to Increase Job Finding Rates: Protocol for a Systematic Review

Benefit programmes protect individuals against loss of income and provide unemployed individuals the possibility of finding a better match between their qualifications and job vacancies. This positive aspect of inducing workers to achieve better job matches has been shown to increase economic efficiency (Acemoglu & Shimer, 1999; Marimon & Zilibotti, 1999). However, unemployment benefits may also distort incentives by subsidizing long and unproductive job searches. In fact, the generosity of unemployment benefits is generally considered the main factor by which benefit systems affect unemployment. From a societal point of view, therefore, the optimal unemployment benefit system will balance considerations for protection with those for distortion (Feldstein, 2005; Mortensen, 1987). Theory suggests that putting a limit on benefit duration will tend to accelerate job search from the beginning of the unemployment spell and thereby shorten unemployment duration (Pissarides, 2000). Thus, generosity of benefits is determined not only by the amount paid but also by the duration of benefit entitlement. In the US, replacement rates1 are low and duration is short compared to benefit systems in most European countries. In 2005 the maximum duration of unemployment insurance entitlement among OECD countries 2 was shortest in the US at 6 months 3 and longest in Denmark, Norway, Portugal, the Netherlands, France, Finland and Spain, varying between 23 and 48 months (OECD, 2007). At the same time, the gross initial replacement rate was around 50% in the US, while varying between 62% and 90% in the aforementioned European countries. The lower level of generosity of benefits in the US compared to Europe is consistent with the observation of higher levels of active searches and a greater willingness to accept inferior jobs by unemployed workers in the US compared to Europe (Layard, Nickell & Jackman, 2005). As a consequence European policy-makers may be tempted to reduce the generosity of unemployment systems in order to reduce high unemployment levels4. While lowering the replacement rate may be politically intractable (indeed, examples of reductions of benefit rates and amounts are rare), the length of the unemployment benefit entitlement period is often used as a political instrument to improve work incentives for the unemployed. In Spain, for example, the benefit period was altered in 1992, in Slovenia in 1998, in Norway in 1997, in the UK in 1996, in Denmark in 1996, 1998 and 1999, and, more recently, in the Czech Republic in 2004, in Hungary and Portugal in 2006, and in Denmark again in 2010. The important public policy question is whether a more generous unemployment benefit system is causally related to higher unemployment rates. As pointed out in Card and Riddell (1993), there can be several complementary explanations for high unemployment rates, including differences in the fraction of nonworking time that is reported as unemployment (particularly among individuals with very low levels of labour supply), and differences in the overall distributions of working and nonworking time. Recent research on the effect of extended duration of unemployment insurance benefits in the US shows that benefit extensions raised the unemployment rate, but at least half of the effect is attributable to reduced labour force exit among the unemployed rather than to the changes in reemployment rates that are of greater policy concern (Rothstein, 2011). This review will focus on the effect on job finding rates of reducing the maximum duration of entitlement of unemployment benefits, and secondarily on the effects on the quality of these jobs. The intervention of interest is reduction in the maximum duration of entitlement of any kind of unemployment benefit with a known expiration date. The benefits may be unemployment insurance (UI) benefits, or they may be unemployment assistance (UA)/social assistance (SA) benefits as long as they have a known expiration date. In the majority of OECD countries, the UI benefit has a time-limit. In fact, only Belgium has an unlimited UI period. In other countries, the maximum duration varies between 6 months (as for example in the UK and the US) and 36 months (in Iceland). In most OECD countries, a secondary benefit is available for those who have exhausted regular UI benefits. This is known as SA benefits. Unlike UI benefits, SA benefits are generally means-tested without any necessary connection to past employment; they pay a lower level of benefit and are indefinite. We know of only one example of a SA benefit with a time limit: the Temporary Assistance to Needy Families (TANF) which is available in the US. The federal government requires states to impose between 2- or 5-year limits on TANF (Gustafson & Levine, 1997). In a minority of OECD countries, UA benefits are paid after exhaustion of UI benefits. Like SA benefits, they are generally means-tested, pay a lower level of benefits and, excepting Hungary, Portugal and Sweden, are indefinite. Unemployment benefits with an indefinite time limit or non-financial benefits will be excluded from this review. Search theory offers an explanation for how this intervention might work. According to search theory, one can derive a relationship between the job-finding rate and the parameters of the benefit system, in particular the maximum benefit duration and the replacement rate (Mortensen, 1977). This relationship is driven by adjustments in search effort and reservation wages. The reservation wage is the minimum wage at which the unemployed are willing to accept a job. Forward-looking unemployed workers chose their current search effort and reservation wage in order to maximize the sum of the utility flow realized during the current period, plus the expected discounted future utility flow given that an optimal strategy will be pursued in every future period. The current search effort and reservation wage are thus affected by the future level of benefits. When the benefit period expires, the unemployed person experiences a potentially large drop in income. As the time of benefit exhaustion approaches, the value to that person of remaining unemployed falls, implying a higher search effort and/or a fall in the reservation wage, leading to a higher exit rate out of unemployment (Mortensen, 1977). This non-stationarity implies that unemployed individuals with different lengths of benefit entitlement have different optimal paths of reservation wage and search effort over time (van den Berg 1990). A shorter entitlement period gives the unemployed individual a stronger incentive to quickly gain employment in order to avoid the drop in income after the exhaustion date. How strong the incentive is depends on the magnitude of the income drop. If no secondary benefit is available for those who have exhausted their current benefit, the incentive to gain employment will be stronger. If an increased job finding rate is mainly driven by lowering the reservation wage, a lower job match quality is to be expected, for example, in the form of lower wages and/or lower re-employment duration. A number of factors may have an impact on the magnitude of the expected increase in the job finding rate. In general, the overall labour market conditions (i.e. the vacancy rate5 and, in particular, the unemployment rate) have an impact on the availability of and competition for jobs. If the vacancy rate is high (i.e. the number of vacancies is high in relation to job seekers) we would expect a bigger effect on job finding rates than if the vacancy rate is low. We would further expect a lower effect if the unemployment rate is high, regardless of the vacancy rate. If the vacancy rate is low coincident with a high unemployment rate, competition for available jobs is likely to be high. If the vacancy rate is high coincident with a high unemployment rate, it suggests mismatch in the labour market (i.e., the process by which vacant jobs and job seekers meet is not efficient) (Filges & Larsen, 2000; Pissarides, 2000). Whether compulsory participation in active labour market programmes is part of the unemployment system may also have an impact on the effect of maximum duration of entitlement. The compulsory aspect of activation may provide an incentive for unemployed individuals to look for and return to work prior to programme participation; the so called threat effect. Filges and Hansen (2015) summarize the available evidence on the threat effect of active labour market programmes and report a significant threat effect of compulsory participation in active labour market programmes. Further, actual participation in active labour market programmes may improve some of the participants' qualifications, thus helping them to find a job. Alternatively, active labour market programmes may have negative stigmatization and signalling effects to employers. Programmes associated with participants having poor employment prospect may carry a stigma. Because of asymmetric information, employers do not know the productivity of new workers, some of whom they might hire from the pool of the unemployed. Prospective employers might then perceive participants in such programmes as low productivity workers or workers with tenuous labour market attachment (Kluve et al. 1999; Kluve et al., 2007). A recent systematic review by Filges et al. (2015) investigated the effect of participating in active labour market programmes and found that there is a significant positive effect, although small, of participating in active labour market programmes. The effect reported in Filges et al. (2015) is however a pure post-programme effect of active labour market programmes; it refers to the period after participation in a programme. The net effect of active labour market programme participation on job-finding rates is, however, composed of two separate effects: a lock-in effect and a post-programme effect. The lock-in effect refers to the period of participation in a programme. During this period, job-search intensity may be lowered because there is less time to search for a job, and participants may want to complete an on-going skill-enhancing activity; hence the lock-in effect. The combination of the two effects, lock-in and post-programme, consequently determines the net effects of active labour market programme participation on unemployment duration. These additional effects on the search behaviour and employment prospects when compulsory participation in active labour market programmes is part of the unemployment system may dampen the observed effects of maximum duration of entitlement on job finding rates. Finally, the type of unemployment benefit may have an impact on the effect on the job finding rate. As mentioned above, some countries employ two systems to provide benefits to unemployed individuals: an unemployment insurance system for individuals who typically have a strong labour market attachment (UI benefits) and a social welfare system for individuals who often have other problems in addition to unemployment (SA or UA benefits). The effect size in social welfare systems offering unemployment benefits with a known expiration date is, due to the participants' lower labour market attachment, expected to be less than the effect size in unemployment insurance systems with a known expiration date. In order to reduce high unemployment levels, policy-makers may wish to reduce the generosity of the unemployment system either in amount (the replacement rate) or in maximum potential duration. The positive correlation between unemployment benefit generosity in terms of the replacement rate and unemployment duration is well established at the empirical level (Layard et al., 2005). However, it may be politically intractable to lower the replacement rate, and there are indeed strong efficiency and equity arguments for having a reasonable value of unemployment benefits (Acemoglu & Shimer, 1999; Marimon & Zilibotti, 1999). Search theory suggests that an increase in unemployment benefit generosity, in terms of maximum duration of benefit entitlement, has a negative impact on the job search activities of the unemployed increasing their unemployment duration. There is clear evidence that the prospect of exhaustion of benefits results in a significantly increased incentive for finding work, although the effect is small (Filges et al., 2013). Hence, shortening the benefit eligibility period may reduce the share of long and unproductive job searches somewhat. The conclusion in Filges et al. (2013) however leaves unanswered the question of by how much reducing the maximum unemployment benefit entitlement will decrease unemployment duration. There are many empirical papers on the effect of maximum benefit entitlement on unemployed individuals (Caliendo, Tatsiramos and Uhlendoff 2009; Bennmarker, Carling & Holmlund, 2007; Ham & Rea, 1987; Hunt, 1995; Katz & Meyer, 1990 and Lalive & Zweimüller, 2004), but the empirical research has not been summarized in a systematic review to obtain a clearer picture of the available evidence on the employment effect of reducing maximum duration of benefit entitlement. One paper provides a review of the literature on how incentives in unemployment insurance can be improved (Fredriksson and Holmlund 2006). However, it is not a systematic review and, furthermore, the authors do not make the important distinction between exits to employment and exits to other destinations such as such as other kinds of benefits or out of the labour force. Distinguishing between destinations is vital. As shown in Card, Chetty and Weber (2007), the exit rate from registered unemployment increases over 10 times more than the rate of re-employment at the expiration of benefits. The difference between the two measures arises because many individuals leave the unemployment register immediately after their benefits expire without returning to work. There is a great deal of political interest in optimizing the unemployment benefit system so it balances the protection and distortion dimensions. The political interest is to reduce the unemployment level, to prevent exploitation of the unemployment benefit system and at the same time protect the unemployed individuals from the consequences of involuntary unemployment. It is therefore of great importance to establish the effect of reducing maximum duration of unemployment benefit entitlement on employment probabilities. 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 such as high/low educated or men/women, and further explore from which point in the unemployment spell do unemployed individuals react to the length of benefit entitlement. The title for this systematic review was approved in The Campbell Collaboration on 9. October 2012. Study designs that use a well-defined control group are eligible. The main control or comparison condition is no change in maximum duration of benefit entitlement. Non-randomized studies, where the reduction in maximum duration of benefit entitlement has occurred in the course of usual decisions outside the researcher's control must demonstrate pre-treatment group equivalence via matching, statistical controls, or evidence of equivalence on key risk variables (e.g., labour market conditions) and participant characteristics. These factors are outlined in section ‘Assessment of risk of bias in included studies’ under the subheading of Confounding, and the methodological appropriateness of the included studies will be assessed according to the risk of bias model outlined in section ‘Assessment of risk of bias in included studies’. Studies of the effect of reducing unemployment benefit entitlement typically are estimated on data collected from administrative registers or by questionnaires. Studies that use different data sources for treatment and control groups will not be eligible. Only studies that use individual micro-data are eligible. Studies that rely on regional or national time series data are not eligible, even though micro-econometric estimates of individual effects merely provide partial information about the full impact of shortening the maximum duration of benefit entitlement (Calmfors, 1994; Calmfors, 1995). We will include studies irrespective of their publication status, and their electronic availability. We will include unemployed individuals who receive some sort of time limited benefit during their unemployment spell. The International Labour Office (ILO) definition of an unemployed individual is a person, male or female, aged 15-74, without a job who is available for work and either has searched for work in the past four weeks or is available to start work within two weeks and/or is waiting to start a job already obtained (ILO, 1990); however, different countries may apply different definitions of an unemployed individual, see for example Statistics Denmark (2009). We will include participants receiving all types of unemployment benefits with a known exhaustion date. The only restriction is that the benefits must be related to being unemployed. We will therefore exclude individuals who only receive other types of benefits not related to being unemployed. We will include all unemployed participants regardless of age, gender, etc. who receive some sort of time limited benefit during their unemployment spell. The intervention is reduction in the maximum duration of entitlement of any kind of unemployment benefits. The benefits may be unemployment insurance (UI) benefits or they may be unemployment assistance (UA)/social assistance (SA). The only requirement is that the benefit must have a known expiration date. The UI benefit usually has a known time-limit whereas UA and SA usually are indefinite. Unemployment benefits with an indefinite time limit or non-financial benefits will be excluded from this review. The objective is to determine whether reducing the maximum entitlement to unemployment benefits motivates unemployed individuals to find a job more quickly. Distinguishing between destinations is therefore vital. The primary outcome is exits to employment. Studies only looking at exits to other destinations such as other types of social benefits or non-employment and studies who do not distinguish between destinations are not eligible. We will consider secondary outcomes in terms of the impact that reducing the maximum duration of entitlement of benefit has on the duration of re-employment and on income. This will the done in order to obtain a clearer picture of the effect that reducing the maximum entitlement of unemployment benefit has on the quality of the job. If the duration of re-employment or the wage is low, this could indicate that reducing entitlement forces unemployed individuals to find jobs that do not match their qualifications and therefore they may return to unemployment quickly. Outcomes measured as hazard ratios may be reported as an overall effect on the hazard ratio, or may be reported separate for various unemployment duration intervals. All time points reported will be considered. All types of settings are eligible. Relevant studies will be identified through electronic searches of bibliographic databases, research networks, government policy databanks and internet search engines. No language or date restrictions are applied in the searches6. An example of the search strategy for Business Source Elite is listed in Appendix 1.4. The strategy will be modified for the different databases. We will report full details of the modifications in the completed review. Additional searches will be made by means of Google (including Google Scholar) and we will check the first 150 hits. OpenSIGLE will be used to search for European grey literature (http://opensigle.inist.fr/). Copies of relevant documents will be made and we will record the exact URL and date of access for each relevant document. Websites of the following private independent research institutes and economic networks will be searched: IZA -- Institute of the Study of Labor (www.iza.org) CEPR -- Centre for Economic Policy Research (www.cepr.org) NBER -- National Bureau of Economic Research (www.nber.org) MDRC -- the Manpower Demonstration Research Corporation -- (www.mdrc.org) CESifo -- the cooperation between CES (Center for Economic Studies) and IFO (Institute for Economic Research) -- (www.cesifo-group.de/portal/page/portal/ifoHome) are all covered via IDEAS. In addition we will look into the following sites: Danish Economic Councils (www.dors.dk) OECD - the Organisation for Economic Co-operation and Development (www.oecd.org) IMF - The International Monetary Fund (www.imf.org) AIECE - Association of European Conjuncture Institutes (www.aiece.org) ESRC - Economic Social Research Council (www.esrc.ac.uk) Copenhagen Economics (www.copenhageneconomics.com) SSRN -- Social Science Research Network (www.ssrn.com) will also be searched to uncover potential preprint discussion papers. Unpublished theses and dissertations will be searched through the and dissertations and Copies of relevant documents from sources will be We will record the exact URL and date of of included studies and of relevant will be of Labor and will be searched for the and the available of of included studies and relevant will be searched for potential new with national and will be considered to and on-going We expect that a of the studies we will have been without of there is no for in labour market This among other from some of of participants due to about of The in these studies without of participants is the of the effect. studies use in benefit or changes of the maximum entitlement period. A policy is to the maximum benefit period when labour market conditions are expected to studies use this policy to the effect on unemployment duration & Rea, 1987; Hunt, and Katz & Meyer, 1990). 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