Thursday, May 26, 2011

The OECD and Unemployment Assistance

This week the OECD published an update of it’s economic outlook.  The projections for Ireland did not reflect the optimism of College Green earlier in the week.  There was more coverage of a presentation given by the OECD’s Patrick Lenain to the Foundation for Fiscal Studies.  The Irish Independent reported the story as ‘Cut the Dole and get the Jobless back to Work’.  This seems to indicate that one follows the other which is a clear non-sequitur.

The feature of Lenain’s presentation that has garnered most attention is to recommendation to have declining assistance payments to the long-term unemployed.  The slides of Lenain’s presentation can be found here.  This element can be found on slide 32 of the 35 in the presentation. The contents of the slide are reproduced here.

Unemployment benefits (UB): support income without reducing work incentives

  • UB (JA and JB) prevent jobseekers from falling into poverty.
  • But their design implies high replacement rates and work disincentives for low-skilled workers, especially when combined with secondary benefits.
  • In due time, review UB level to reduce risk of unemployment persistence and reduce fiscal cost.
  • Best practices: allow benefits to decline with duration; increase monetary incentives to take up work offers.
  • Return to work is best protection against poverty.

The suggestion is that the “best practice” is that unemployment assistance payments should decline with duration.  The slide indicates that “return to work” is the best protection but it seems to ignore the possibility of returning to work.

In normal labour market conditions there may be some merit in declining unemployment assistance payments, though Irish labour market conditions are distressed rather than normal. 

Here is a graph from Denmark that gives appears to give credence to view.  The Danish system was mentioned in a television discussion of the OECD presentation.  The graph is taken from page 92 of this report (in Danish!).  The graph shows the percentage of unemployed people who return to employment each month.  The green line shows data from 2005 to 2007 when unemployment benefits lasted for four years.

Return to Employment

The graph shows that for all durations of unemployment of between one and four years that about 2% of people return to employment.  It is slightly higher for shorter durations and then declines to the 2% level until it spikes dramatically at four years.  The proportion of people who have been unemployed for four years that return to employed surges to nearly 14% and declines thereafter.  The clear implication is that cutting unemployment benefits encourages people to return to unemployment.

I am not sure that the implication is supported by the evidence.  The graph does highlight that people respond to incentives.  I cannot read the Danish report and it would be interesting to see how many people actually remained unemployed for the full four years.  It may that 14% of people unemployed get a job as soon as the payments expire but this could be 14% of a very small number of people if most people have got a job before the four year deadline is reached.  This is likely true as about 2% of unemployed people at each duration up to four years re-entered employment.   How many would be left after 47 months have passed?

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