The generosity of the Unemployment Insurance system (UI) plays a central role for the job search behavior of unemployed individuals. Standard search theory predicts that an increase in UI benefit generosity, either in terms of benefit duration or entitlement, has a negative impact on the job search activities of the unemployed increasing their unemployment duration. Despite the disincentive effect of UI on unemployment duration, UI benefit generosity may also increase job quality by allowing individuals to wait for better job offers. In this paper we use a sharp discontinuity in the maximum duration of unemployment benefits in Germany, which increases from 12 months to 18 months at the age of 45, to identify the effect of extended benefit duration on unemployment duration and employment stability, as a measure of job match quality. We find evidence of a significant positive effect of extended benefit duration both on unemployment and employment duration. At around one year of unemployment duration, individuals with longer unemployment benefits duration experience significantly lower exit rates from unemployment, as the reservation wage for the unemployed workers below the threshold of age 45 declines the closer they get to the exhaustion point of 12 months. Jobs, however, accepted within 10-12 months since unemployment last longer for the treated unemployed. This suggests that those below the threshold tend to accept jobs that the treated unemployed who receive additional 6 months of insurance could reject and only accept jobs that are of better quality.


Konstantinos Tatsiramos, PhD


23.04.2009 | 16:00 - 17:30 Uhr


ZEW, L 7,1 D-68161 Mannheim




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