Unemployment Insurance in FinlandA Review of Recent Changes and Empirical Evidence on

Behavioral Responses

Tomi Kyyra, Hanna Pesola, and Aarne Rissanen

VATT Institute for Economic Research

January 24, 2017

The aim of the background report

1. To provide an overview of the Finnish UI system

I Changes in eligibility conditions, benefit levels and benefitduration since 2000

I How these have changed overall generosity of UI over time

2. To summarize what we know about the effects of UI in theFinnish labor market

I Employment conditionI Benefit levelsI Potential benefit durationI Extended benefits for the older unemployed (“unemployment

tunnel” scheme)

Some new results using data from FIVA, Kela, ETK and TEM

Main changes in UI scheme 2000–2017Changes in different components have affected generosity in opposite directions

I Eligibility conditions have become more lenient over time

I Employment condition from 43 weeks within 24 months to 26

weeks within 28 months (2003, 2010 and 2014)

I Benefit periods have become shorter

I From 500 days to 300 or 400 days depending on work history(2014 and 2017)

I Age limit for extended benefits increased from 55 to 59

I Replacement rates were increasing until 2012, some benefitcuts thereafter

Replacement rate as a function of past wage(replacement rate = benefit / wage)

On top of the increases shown in the graph, higher benefits paid for those withlong work history (2003–2016) and for duration of ALMPs since 2005

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1000 1500 2000 2500 3000 3500 4000 4500 5000

Re

pla

cem

en

t ra

te

Monthly wage

2012-2014

2015-2017

2000-2001

2002-2009

2010-2011

Distribution of replacement rates in 2003, 2008 and 2013(replacement rate = benefit / wage)

0

1

2

3

4

5

Ker

nel d

ensi

ty e

stim

ate

0.0 0.2 0.4 0.6 0.8 1.0Replacement rate

2003 20082013

Evolution of UI generosity over 2000–2017The maximum amount of UI benefits an average unemployed worker could possiblyreceive according to year t rules

Shorter employment condition andincreased benefits for unemployedwith long work history

Shorter employment condition andhigher rate for increased benefits

Reduction in duration andabolishment/lower rateof increased benefits

Increase in age limitfor extended benefits

25000

26000

27000

28000

29000

30000

31000

32000

33000

34000

35000

Max

imum

UI b

enef

its

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Year

Behavioral effects of UI

1. Employment condition and unemployment inflow

I Shorter employment condition may increase unemploymentinflow

I No evidence of such an effect for the 2003 reform

2. Effects of UI benefits on unemployed

I Higher benefits and longer benefit periods lead to longerunemployment spells

I .... but may also lead to better matches between job seekersand vacant jobs

I Longer unemployment spells are less problematic if theylead to better job matches

I The effects of benefits on the quality of post-unemploymentjobs are also important

Re-employment rate as a function of benefit entitlement25–54 years old UI recipients who became unemployed 2001–2004 due to job loss

One week = 5 benefit days

0.00

0.02

0.04

0.06

0.08

Weeks until UI benefit expires

Wee

kly

exit

rate

100 90 80 70 60 50 40 30 20 10 0 −10 −20

Effects of benefit level and benefit duration

A 10% increase in

benefit level(a benefit duration(b

... will change:

unemployment duration 8% or 15-20% 5%

next wage -10% 0.5%

duration of next job 10% 2%

earnings within 2-year period -10%

a)Uusitalo & Verho (2010) and Kyyra & Pesola (2016)

b)These are new results

These are accurately estimated and relatively robust effects

Summary

I Generosity of UI increased in 2002–2003 and 2012, but droppedback to its initial level during 2015–2017

I Employment condition has no effect on inflow

I Both higher benefit levels and longer benefit periods lead tolonger unemployment spells

I The former has a stronger effect (an elasticity of 0.8 vs 0.5)

I Longer benefit periods lead to longer job spells afterward,otherwise no robust evidence of positive effects on match quality

Employment condition and unemployment inflowDistribution of contribution weeks before and after the 2003 reform

I Contribution weeks = number of employment weeks within past 24 monthsI Those who became unemployed 2000–2001

0

2

4

6

8

Contribution weeks

Sha

re o

f spe

lls, %

4 20 34 43 60 80 104

Pre−reform spellsPost−reform spells

Old threshold of 43 weeks

Employment condition and unemployment inflowDistribution of contribution weeks before and after the 2003 reform

I Contribution weeks = number of employment weeks within past 24 monthsI Those who became unemployed 2000–2001 and 2002–2003

0

2

4

6

8

Contribution weeks

Sha

re o

f spe

lls, %

4 20 34 43 60 80 104

Pre−reform spellsPost−reform spells

New thresholdof 34 weeks

Old threshold of 43 weeks

Employment condition and unemployment inflowDistribution of contribution weeks before and after the 2003 reform

I Contribution weeks = number of employment weeks within past 24 monthsI Those who became unemployed 2000–2001 without June spells

0

2

4

6

8

Contribution weeks

Sha

re o

f spe

lls, %

4 20 34 43 60 80 104

Pre−reform spellsPost−reform spells

New thresholdof 34 weeks

Old threshold of 43 weeks

Effect of eligibility for extended benefits

I 1949 cohort eligible if unemployed at age 55+ (year 2004)I 1950 cohort eligible if unemployed at age 57+ (year 2007)

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01/49 05/49 10/49 01/50 05/50 10/50Date of birth

2003

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1

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5

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12

01/49 05/49 10/49 01/50 05/50 10/50Date of birth

2005

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5

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01/49 05/49 10/49 01/50 05/50 10/50Date of birth

2008

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5

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11

12

01/49 05/49 10/49 01/50 05/50 10/50Date of birth

2011

Months employed Months unemployed