Unemployment Insurance versus Minimum Income - Effects on Working Behavior over the Life-cycle

Abstract

In this paper we develop a dynamic structural life-cycle model of labor supply behavior which accounts for endogenous accumulation of human capital and for the effect of the tax and transfer system on work incentives. In addition to income tax, social security contributions and social assistance, we model unemployment insurance benefits which are endogenous with respect to life-cycle employment. Specifically, an individual’s recent employment history determines the duration of eligibility to unemployment insurance benefits while the level of these benefits is tied to previous earnings. We use this framework to study the life-cycle employment effects of transforming a traditional welfare state, as is currently in place in Germany, towards a more Anglo-American system in which the period of entitlement to unemployment insurance payments is reduced and payments do not depend on previous earnings.