Unemployment and the Structure of Unemployment Benefits

Abstract

Analysis suggests that the higher the replacement ratio, that is the level of unemployment benefit relative to average earnings, the higher the level of unemployment is likely to be. This effect comes about in two main ways. The replacement ratio will influence both the rate of inflow into unemployment and the period for which people remain unemployed. The empirical evidence supports these propositions although the sensitivity of unemployment to changes in the replacement ratio is fairly weak. In the light of equity considerations reducing unemployment benefits as a policy weapon to counteract unemployment is thus not a viable option. Changing the rules relating to part-time earnings and unemployment benefit however could reduce long-term unemployment.