Measuring Unemployment Insurance Generosity and Efficiency

Abstract

The objective of this study is to measure and compare unemployment insurance (UI) policies among different countries based on generosity and efficiency. A modified modeling framework from Pallage, Scruggs, and Zimmermann (2013) is utilized that excludes savings by agents but incorporates endogenous job search intensities.

To measure UI generosity two models are created: 1) a simple model where everyone is eligible for UI and receives benefits indefinitely until re-employment; and 2) a complex model, based on realistic UI policy, which incorporates a waiting period, a UI entitlement status, benefit payments and durations, as well as social assistance policies. The models are calibrated to match an unemployment rate and a share of short-term unemployment of a specific country. The only difference between the two models is the UI policy in place. The generosity metric is then calculated as the replacement ratio in the simple model such that agents are indifferent between the simple UI scheme and the complex (realistic) UI policy. Alongside the generosity metric, an efficiency measure is created that measures the utility loss from moving from the benchmark UI system (offering optimum level of benefits) to the realistic UI system. The countries investigated are Canada, United States, France, and Germany post and pre Hartz reforms.

The main results show that Germany pre-reform is the most generous system followed by USA, Germany post-reform, France, and Canada. Rankings based on efficiency display similar pattern. A welfare comparison between Germany pre and post Hartz reform showed that the reform reduced UI generosity, decreased UI efficiency, and caused welfare to either decline or slightly increase depending on the specified risk aversion coefficient. Finally, the sensitivity results reveal that USA is the least generous UI system when housing assistance is removed from the social assistance benefit calculations.