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

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132), disagrees: “Despite continuing controversy, the general conclusion is that though
the duration of unemployment is likely to be slightly longer at higher replacement rates,
the magnitude of the effect is not large.” With the benefit of research done in the 1990s
on this question, Holmlund (1998, p. 118) contends that the Lancaster and Nickell
conclusion “was surely premature. The effect of benefits on unemployment duration is
far from a firmly established parameter that is comparable in robustness to, say, estimates
of the returns to schooling.”
More recent studies have found stronger evidence for a benefits effect on
unemployment duration. For Norway, Roed and Zhangs (2003, p. 204) find that a 10
percent decline in benefits “may cut a 10-month duration by approximately one month
for men and 1-2 weeks for women.” For Austria, Lalive and Zweimuller (2004), examine
a massive policy change provided an ideal “natural experiment.” Anticipating
deteriorating labor market conditions in regions with heavy steel industry employment,
the Austrian government “dramatically increased benefit generosity” for some workers in
certain regions from 30 to 209 weeks. They found a reduction in the transition rate to jobs
of 17 percent, which meant “increasing unemployment duration by about 9 weeks,
leading to an increase in unemployment duration per week of additional benefits of .055”
(p. 2610). The distinctiveness of this study was that they were able to take into account
policy endogeneity – had they not been able to account for actual changes in the labor
market, the decline in the transition rate to jobs would have appeared to have been much
larger - 40 percent.
Jan van Ours and Vodopivec (2005, p. 3) investigate a 1998 reform of the benefits
system in Slovenia that “drastically reduced the potential duration of unemployment
benefits” and find “important and sizeable disincentive effects” (p. 17). With the drop in
the maximum duration of entitlements from 12 to 6 months, they found that the share of
unemployed who found a job within 6 months rose from 44 percent to 52.4 percent, an
8.4 percentage point gain. But interestingly, those who exited unemployment but not into
employment (out of the labor force) increased from 6 percent to 15.1 percent, an increase
of 9.1 percent. As the authors point out, the benefits of the rise in exits to employment
“have to be weighted against possible additional hardship created by the curtailment of
benefit entitlement, as well as worse quality of post-unemployment jobs in terms of their