Staying on the Dole

at the expense of STU (∂hA∕∂τ > 0 for e > 0).

An exogenous extension of the eligibility period τ also affects workers with relatively high skill
levels. These workers would also have chosen to use a STU spell to invest in human capital, but
with a higher τ , they find this option less attractive than entering employment. The derivative
of h^C shows that devaluation of retraining is the dominant effect on STU if taxes are low and if
labor market tightness is low (since both further increase the value of being quickly employed
again). While this interpretation of exogenous changes of τ on human capital are fairly intuitive,
the reverse interpretation is perhaps more plausible. In this case, τ is interpreted as decision
variable depending on h. Interpreted in this way, the derivative shows that a worker’s preferred
duration of STU for retraining purposes decreases with his initial endowment of human capital,
∂τ∕∂h^c < 0.

The “normal” reaction of increasing unemployment for increasing duration of unemployment
benefits payments ∂h^c/∂τ > 0, is obtained when market frictions and taxes are sufficiently
high. In this case, longer eligibility makes remaining in STU more attractive and employment
decreases. In other words, interaction terms matter (see Belot and van Ours, 2004, and Nickell
et al., 2005). In a U.S.-style welfare system where λ₀ is small and φ is large (because taxes θ and
benefits b are low), the effect of longer eligibility on STU will be small and possibly ambiguous.
In a European-style welfare state where λ₀ is large and φ is small the effect of benefit eligibility
on STU is positive and possibly large.

3.3. Welfare Assistance. Higher welfare assistance changes the composition but not the over-
all level of unemployment. Higher welfare assistance increases LTU because some low-skill STU
find it attractive to remain on the dole permanently, but it does not increase overall unem-
ployment. In Figure 1, an increase in welfare assistance moves h^A to the right and leaves h^C
unaffected.

∂hA _     1             ∂h^c _

∂s = (1 - θ)(1 - d) > ^, ∂s =

Workers at the upper end of the education spectrum may consider to use an unemployment spell
for some further retraining but staying permanently on the dole is never an option for them.
Thus, the decision between employment and STU is unaffected by a change in welfare assistance
(∂h^c/∂s = 0). But some workers who previously planned only a short spell of unemployment

11

<<   10   11   12   13   14   15   16   >>

More intriguing information