Unemployment, Welfare Benefits and the Financial Incentive to Work

Abstract

Although disincentive effects associated with payments have been regulaly found in research in the US and UK, the UK research is disputed and effects have been notable by their absence in studies from Continental Europe. However, much of this research has been hindered by inadequate models of the structure of payments and estimates of in work incomes. In this paper we explicitly model the structue of benefit payments over time and estimate in work income using the SWITCH tax/benefit model. We find that the hazard of exit from unemployment is negatively related to unemployment payments, but distinctive effects appear to influence only those receiving Unemployment Benefts (UB) and are small when compared internationally. Moreover, the exit rate increases for this group as exhaustion approaches at 15 months duration. We find no significant distinctive effects amongst those receiving Unemployment Assistance (UA).