Unemployment, Welfare Benefits and the Financial Incentive to Work

Although much has been written about the relationship between unemployment durations and unemployment payments in the last two decades, the nature of the relationship remains problematic. Although disincentive effects associated with payments have been regularly found in research in the US and UK, the UK research is disputed and effects have been notable by their absence in studies from Continental Europe. However much research in this area has failed to adequately take into account the structure of unemployment payments and the fact that these may have a limited duration. Measurement problems when modeling disincentive effects also rear their head in the use of poor estimates of benefit levels and in work incomes. In this paper we use detailed information from the Living in Ireland Panel Survey on actual benefit levels in the household and estimates of in work income from the SWITCH tax benefit model to examine the effects of various disincentive measures on the duration of unemployment spells between 1994-5 and 1997-8. Moreover, we also explicitly model the structure of benefit payments by examining the effect of limited benefit duration. Our findings suggest that controlling for other factors, the hazard of exit from unemployment is negatively related to unemployment payments. However, the type and structure of payments is important. Disincentive effects appear to influence only those receiving Unemployment Benefits (UB) and among this group the exit rate increases as exhaustion approaches at 15 months duration. We find no significant disincentive effects amongst those receiving Unemployment Assistance (UA). The disincentive effects among UB recipients in Ireland are also of a much smaller size than those found in other studies in the UK, the US and Continental Europe.