Are Labor Market Institutions Really at the Root of Unemployment ...

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replacement rates more than twice as high (60-80% vs 30%). With data from Martin
(1996), we also found a negative relationship for 1994/5 (not shown).
Long duration of benefits is also expected to help explain high unemployment.
Figure 3 shows benefit duration against unemployment, with duration measured as the
ratio of the net replacement rate in the 60 th month of benefit receipts to the “initial phase”
on the entitlement (effectively the 1 st month). This duration measure can be greater than
one because for the generally smaller group still eligible for assistance in the 60 th month,
more kinds of social assistance may be available than in the initial phase. The data are
shown for 2001, the most recent data available for short and long term net replacement
rates. Figure 3 shows that this measure of benefit duration is associated with lower
unemployment. Spain and Italy offered relatively ungenerous long term benefits but have
high unemployment. The figure shows that Ireland, Denmark, the UK and Austria had
similar or lower unemployment than the U.S., but much more generous long-term
unemployment-linked net benefits.
It has been argued that extended duration of generous benefits will have particularly
strong effects on long-term unemployment. Layard et al. (1994) put particular emphasis
on this source of the unemployment crisis: “The unconditional payment of benefits for an
indefinite period is clearly a major cause of high European unemployment” (p. 92, italics
in the original). The only direct evidence they offer for this conclusion is a plot of “the
maximum duration of benefit” in years against the long-term share of unemployment for
the mid-1980s. The authors interpret this diagram to show that “all the countries where
long-term unemployment has escalated have unemployment benefits of some kind that
are available for a very long period, rather than running out after 6 months (as in the
USA) or 14 months (as in Sweden)” (p. 59).
But there is another way to interpret this evidence. First, there appears to be little or
no statistical correlation (no summary statistic is provided). Second, of the 15 countries
that appear in the figure, 9 had the highest duration scores (3.5 to 4 years), and these 9
countries had long-term unemployment that ranged fairly evenly from just 20% to 70%.
And third, the poor quality of the duration data raises questions about the meaningfulness
of whatever correlation there might be. In their survey of the benefit entitlement
literature, Atkinson and Micklewright (1991) single out these data for criticism, pointing