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Effects of changing the unemployment insurance entitlement period

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A 2014 SFI report analyses the consequences of shortening the maximum unemployment insurance (UI) entitlement period from four to two years. The change had a modest effect, the study shows.

In May 2010 – less than two years after the onset of a major economic downturn from which the labour market is still recovering - the Danish Parliament passed a law shortening the maximum unemployment insurance (UI) entitlement period from four to two years. While cutting the entitlement period in half, the reform also doubled work requirements for eligibility from 26 weeks to 52 weeks.

The new rules were implemented such that UI recipients beginning their unemployment spell in January 2011 were the first with a maximum entitlement period of only two years.

Comparing cohorts

In September 2014, SFI – The Danish National Centre for Social Research – published a report on the consequences of the reform of the UI entitlement.

The report analyzes the exit rates from the UI system of recipients with a two-year entitlement period, those who entered unemployment in the first half of 2011, constituting the treatment group.

The report compares the exit rates of this 2011-cohort with those of recipients entitled to more than two years of UI benefits, consisting of UI recipients beginning their unemployment spell in the first half of 2010 and 2009, with maximum benefit entitlement periods of 2½-3 years and 3½-4 years, respectively.

Spike in exit rate

With exit rates to employment tracking each other closely in all three cohorts in the first 21 months of receiving UI benefits, the results show a striking similarity in the propensity to leave the UI system and enter employment again regardless of differences in the maximum entitlement length. However, after 21 months the exit rates of the 2011-corhort start deviating from those of the two control groups.

After 21 months, 3 months prior to exhaustion of benefits, the exit rates to employment of the 2011-cohort with the shorter maximum benefit entitlement period start to increase, and continue to do so throughout the remaining entitlement period. The exit rates of the two control groups show no sign of change in trend. After benefit exhaustion, the exit rate to employment of the 2011-cohort drops to its previous level, resulting in a well-known spike in the exit rate at benefit exhaustion.

Given the finding that the two control groups, the 2009-cohort and 2010-cohort, very precisely predict the evolvement of the exit rate of the treatment group for as long as 21 months on UI benefits, the two control groups constitute credible control groups to illustrate how the exit rate of the treatment group would have evolved in the last three months prior to exhaustion, had they not been subject to the two-year limit on UI benefit entitlement.

Three months prior to exhaustion, the exit rate of the treatment group, the 2011-cohort, starts to increase from around 1 percent a week, peaking at the week of exhausting UI benefits at a level of around 3-5 percent. These exit rates compare with the exit rate of the two control groups remaining at around 1 percent a week throughout the two years with UI benefits. While the spike at exhaustion constitutes an increase in the exit rate of as much as 200-400 percent compared to the control groups, the number of individuals reacting to the prospect of benefit exhaustion amounts to only 1 percent of the total 2011-cohort.

The relatively modest employment effect of benefit exhaustion partly explains why the total share of individuals who gain employment within two years of receiving UI benefits is not higher, but in fact lower, in the 2011-cohort than in any of the two control groups.

This finding is due to the employment effect not being large enought to compensate for a higher share of the treatment group exiting the labor force. However, the report is not able to determine whether the higher propensity to leave the UI system for something other than employment is related to the length of the maximum entitlement period itself.

Coming changes

Since the reform came into effect in January 2013, the number of individuals exhausting their UI benefit entitlement has vastly exceeded expectations and different temporary public transfers have been introduced to soften the consequences associated with the loss of entitlement. Recently, the Danish Government set up a committee to recommend changes to the current Danish UI system, and the committee is schedule to present their recommendations in September this year.

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