DIW Applied Micro Seminar

Abstract: We investigate whether changes in the generosity of unemployment insurance (UI) affect exit from employment via UI. We exploit a recent reform of German UI that drastically reduced maximum benefit periods for workers aged 45 or older. Economic theory suggests that less generous UI makes employed workers more eager to keep their job, implying a reduction in unemployment entry after the reform. However, such reforms may also have some potentially undesired effects: Workers who exit from employment have an incentive to enter UI before rather than after the reform becomes effective in order to benefit from longer maximum benefit periods. This would imply an increase in unemployment entry after announcement but before actual implementation of the reform. The reform we study was announced 1.5 years before becoming effective, which provides the opportunity to test for both anticipation and ex-post effects of the reform. We use a large administrative dataset that allows separate analyses by gender and potential exit age. For a sample of workers with strong labor market attachment we find a very strong increase in exit rates directly before the reform becomes effective, especially among workers close to the average pre-reform retirement age. Moreover, exit rates to UI decrease for workers aged 57 or older compared to pre-reform-announcement levels once the changes in UI have been implemented. We show that our empirical findings can be explained by a simple retirement model that allows for exit from the labor market via UI.