How Extended Unemployment Benefits for Older Workers Affect Labor Market Exit, Disability Enrollment, and Social Security Claims

Transcription

1 How Extene Unemployment Benefits for Oler Workers Affect Labor Market Exit, Disability Enrollment, an Social Security Claims Lukas Inerbitzin, University of St.Gallen, Stefan Staubli, University of Calgary, University of Zurich, an IZA Josef Zweimüller, University of Zurich, CEPR, CESifo, an IZA September 13, 2014 Abstract We explore how extene unemployment insurance (UI) benefits for oler workers affect This paper explores how extene unemployment insurance (UI) benefits targete to oler workers affect early retirement an social welfare. We argue that the analysis of UI s trae-off between consumption smoothing an moral hazar nees to consier the entire early retirement system, which often consists of extene UI an relaxe access to isability insurance (DI). We argue that extene UI generates program complementarity (higher future take-up of DI an/or regular retirement benefits) or program substitution (lower contemporaneous take-up of DI benefits). Exploiting Austria s regional extene benefit program, which extene regular UI benefits to up to 4 years, we fin: (i) program complementarity is quantitatively important for workers age 50+; an (ii) program substitution is quantitatively relevant for workers age 55+. We erive an optimal UI formula in the spirit of Baily (1978) an Chetty (2006a) that features program complementarity an program substitution. Using the sufficient statistics approach, we conclue that UI for oler workers was too generous an the regional extene benefit program was a suboptimal policy. Keywors: Early retirement, unemployment, isability, policy reform, optimal benefits JEL Coes: J14; J26; J65. Aress: Lukas Inerbitzin, University of St. Gallen, CH-9000 St. Gallen, Switzerlan; lukas.inerbitzin@unisg.ch. Stefan Staubli, University of Calgary, Calgary, AB T2N 1N4, Canaa; sstaubli@ucalgary.ca. Josef Zweimüller, University of Zurich, CH-8000 Zurich, Switzerlan; josef.zweimueller@econ.uzh.ch. We thank Christoph Basten, Monika Bütler, Raj Chetty, Peter Egger, Armin Falk, Anreas Kuhn, Davi A. Jaeger, Claus Thustrup Kreiner, Rafael Lalive, Lucija Muehlenbachs, Kathleen Mullen, Gerar van en Berg, an seminar participants at CREST, IFAU, IZA, NHH Bergen, RAND, University of Bonn, University of Copenhagen, University of Cologne, University of St. Gallen, Stockholm School of Economics, an University of Zurich. Philippe Ruh provie excellent research assistance. This research was supporte by the Austrian National Science Research Network Labor an Welfare State of the Austrian Science Fun an the U.S. Social Security Aministration through grant #1 DRC to the National Bureau of Economic Research as part of the SSA Disability Research Consortium. The finings an conclusions expresse are solely those of the authors an o not represent the views of SSA, any agency of the Feeral Government, or the NBER. All remaining errors are our own.

2 1 Introuction Extening the potential uration of unemployment insurance (UI) benefits is one of the most important policy instruments to ease economic harships of job losers. For instance, the Unite States extene UI benefits from 26 weeks up to 99 weeks uring the Great Recession. The UI systems of many other countries o not let UI generosity vary over the business cycle but rather across groups with ifferent labor market conitions. In particular, many countries grant more generous UI benefits to oler job losers. The present paper stuies the impact of extene UI benefits on employment an retirement behavior an explores the social welfare implications of a UI system that grants more generous benefits to oler workers. The social esirability of UI benefit extensions is highly controversial. Theoretical arguments show that optimal UI faces a trae-off between moral hazar effects, capture by labor supply/job search responses, an consumption smoothing benefits, capture by relaxe liquiity constraints (Baily (1978), Chetty (2008)). 1 In the context of oler workers, this general logic nees to be broaene by consiering the costs an benefits of all welfare benefits that protect oler workers in case of a job loss. In many countries, early retirement schemes allow oler unemploye workers to withraw from the work force by using extene UI benefits in combination with other public transfers (DI benefits an/or retirement benefits). This is what we call program complementarity. Alternatively, more generous UI benefits may inuce workers to reuce take-up of other welfare programs, in particular DI benefits. This is what we mean by program substitution. While program complementarity imposes an aitional buren on government bugets, the impact of program substitution is unclear. 2 The aim of the present paper is twofol. First, we stuy the causal impact of extene UI benefits on (i) the incience of early retirement an (ii) the particular pathways through which workers exit the labor market. We focus on Austria. Uner the Austrian system of the late 1980s an early 1990s, workers age 50+ were eligible for 1 year of regular UI benefits. Moreover, worker age 55+ ha relaxe access to DI benefits. To empirically ientify the causal impact of extene UI benefits for oler workers we exploit a policy intervention that change early retirement incentives ramatically: the regional extene benefits program (REBP). This program was in place between June 1988 an July 1993 an grante regular UI benefits for up to 4 years to workers age 50+ living in certain regions of the country. Variation in the maximum uration of UI benefits across regions an age groups allows us to ientify the causal impact of extene UI benefits on the incience of early retirement an the particular pathways by which workers leave the labor market. 1 While a large literature has ocumente the averse consequences of more generous benefits for unemployment exit rates (see, e.g., Meyer (1990), Katz an Meyer (1990), an Car an Levine (2000)), only few empirical papers have examine the consumption smoothing benefits of UI benefits (Gruber (1997), Browning an Crossley (2001)). 2 When DI take-up is associate with stigma costs or a isutility ue to meical checks/bureaucratic hassles, a worker may ecie to stay unemploye even when UI benefits are smaller than DI benefits. This saves money to the government. In contrast, DI benefits often provie a constant stream of income while alternative early retirement pathways imply varying income levels over time. Liquiity constraine workers may thus prefer DI benefits even if lifetime income is lower. When, starting from such a situation, UI becomes more generous, some worker will switch to UI benefits. This increases government expenitures. 1

3 Since the REBP was only in effect for a limite perio of time we can estimate both the effects of introucing an abolishing extene UI benefits using a ifference-in-ifferences approach. We fin that extene UI benefits have a strong effect on the incience of early retirement. The probability that a job loser age permanently withraws from the labor market increases by 16.2 percentage points when the worker is eligible to the REBP. Among job losers age 55-57, the incience of early retirement increases by 14.8 percentage for those eligible to the REBP. 3 Extene UI benefits also affect the pathways into early retirement. For workers age 50-54, program complementarity increase take-up of UI followe by higher DI benefit claims an/or retirement benefits is quantitatively important. The 16.2 percentage point increase in early retirement is associate with a 12.2 percentage point increase in a subsequent DI take-up. For workers age both program complementarity an program substitution higher take-up of UI but lower take-up of DI are at work. The 14.8 percentage point increase in early retirement is associate with a 24 percentage point increase in subsequently claiming of retirement benefits an a 9.7 percentage reuction in claiming of DI benefits. The secon aim of this paper is to explore the welfare consequences of extene UI benefits for oler workers. We follow the sufficient statistics approach propose by Chetty (2006a) an set up a simple moel that makes precise the impact of more generous UI benefits on labor supply an retirement. 4 Using this moel, we establish a simple rule for optimal UI that accounts for both program complementarity an program substitution. We fin that, given the Austrian early retirement rules of the late 1980s an early 1990s, the extension of UI benefits was welfare-improving only if the egree of risk aversion excees The value of risk aversion remains ispute an a growing boy of literature suggests that risk preferences are context-specific (Chetty an Szeil (2007), Barseghyan et al. (2011), Einav et al. (2012)). Stuies that use labor supply elasticities to estimate risk aversion come closest to our setting. These stuies typically fin values of risk aversion below 1 (Chetty, 2006b). We therefore conclue that extene UI through the REBP was most likely a suboptimal policy. We think our stuy is of general interest for two reasons. First, policy makers in many countries have implemente early retirement schemes an these schemes are both very costly an very controversial. In many countries, reforms reucing the generosity of these schemes are ebate or uner way. In this context, Austria is an interesting case stuy because early retirement schemes were heavily use to mitigate labor market problems of oler workers over the past ecaes. As a result, Austria s effective retirement age has fallen to age 59, well below the OECD average. Secon, while the Austrian early retirement system create particularly large incentives, it works qualitatively similar than in many other countries. Early retirement schemes often feature relaxe DI-eligibility criteria for oler workers, incluing the Unite States (Chen an van er Klaauw, 3 As we explain in more etail in the next section, retirement incentives are ifferent before an after age 55 ue to relaxe access to DI benefits. Moreover retirement incentives between REBP- an non-rebp regions isappear after age 57. This is why our analysis looks at age groups an Recent applications of the sufficient statistic approach for optimal UI esign inclue Shimer an Werning (2007), Chetty (2008), Kroft (2008), Lanais et al. (2010), Kroft an Notowiigo (2011), Schmieer et al. (2012), an Lanais (2012). See the article by Chetty an Finkelstein (2013) for a etaile iscussion of this literature. 2

4 2008), an extene UI benefit urations are extene above certain age threshols, as in Germany, (Schmieer et al., 2012). 5 that are at work (an uner ebate) in many other countries. This suggests that our results illustrates mechanisms of policies Our paper is relate to a growing literature that stuies how multiple social insurance programs affect workers labor supply ecisions an if iffers from the larger literature that stuies the isolate effect of a single program on labor supply an/or early retirement. Autor an Duggan (2003) examine the interaction between unemployment an isability insurance in the Unite States. They fin that less strict meical screening, eclining eman for less skille workers, an an increase in the earnings replacement rate are the most plausible caniates to explain the rise in DI take-up. Using aministrative ata from the Netherlans, Borghans et al. (2012) provie empirical evience that more restrictive DI benefits increase enrollment into other forms of social insurance. Petrongolo (2009) stuies the impact of the UK JSA reform of 1996 that impose stricter job search requirements an aitional aministrative hurles for UI benefit claimants. She fins that the associate fall in UI benefit recipients was associate with higher take-up of DI benefits. Furthermore, rather than increasing the transition to regular jobs, the reform temporarily ecrease the outflow to employment. 6 A recent literature stuies the impact of UI an/or DI on labor supply an retirement of oler workers. 7 Karlström et al. (2008) fin that stricter eligibility criteria for DI benefits in Sween increase take-up of unemployment an sickness benefits, but i not increase employment rates. In contrast, Kyyrä (2010) provie evience that increasing age-threshols for extene UI benefits an tightening meical criteria for DI eligibility in Finlan raise the effective retirement age by almost 4 months. The results of Staubli (2011) suggest that increasing the minimum age of relaxe DI access in Austria lea to a significant ecline in DI enrollment but only a slight increase in employment. Kyyrä an Ollikainen (2008) ocument a strong ecrease in early retirement after a reform in Finlan that increase the eligibility age for extene UI benefits from 53 to 55. Lammers et al. (2013) show that increase search requirements for oler unemploye in the Netherlans increase not only employment rates but also DI take-up. Our paper extens this literature by investigating how extene UI benefits for oler workers affect retirement behavior through program complementarity an program substitution; an by using the estimate behavioral elasticities to explore the welfare implications of extene UI benefits for oler unemploye workers. The paper is organize as follows. In the next section we review the institutional backgroun of Austria. In particular, we iscuss the various pathways to early retirement that the Austrian welfare state offers to oler workers an the rules associate with the regional extene benefit 5 Countries other than Austria an the Unite States that relax access to DI for oler workers inclue Australia, Denmark, Finlan (until 2003), an Sween (until 1997). Countries other than Austria an Germany that exten UI above certain age threshols inclue France, Finlan, Greece, Italy, an Portugal. 6 Spillover effects among social insurance programs have been examine in other contexts by Garrett an Glie (2000), Schmit an Sevak (2004), Boun et al. (2004), Duggan et al. (2007), Roelofs an van Vuuren (2011), an Staubli an Zweimüller (2012). 7 Relate to these stuies is the work on the extension of UI benefits for oler workers by Winter-Ebmer (2003), Kyyrä an Wilke (2007), Lalive an Zweimüller (2004a, 2004b) an Lalive (2008). These papers analyze the UI program in isolation an ignore potential interactions with other social insurance programs. 3

5 program. In Section 3 we escribe our ata an provie some preliminary escriptive evience of the impact of the REBP. Section 4 lays out our ientification strategy. In Section 5 we iscuss our main results. In Section 6 we evelop a theoretical early retirement framework which allows us to aress the welfare consequences of extening the unemployment benefits uration. Section 7 summarizes our main results an raws some policy conclusions. 2 Institutional Backgroun 2.1 Austria s Public Pension System There are three types of government-provie benefits in Austria that affect the timing of workers exit from the labor force: ol-age pensions, isability pensions, an unemployment benefits. Uner the rules in place uring the late 1980s an the early 1990s, an ol-age pension can be claime at any age after 60 for men an 55 for women, conitional on having 35 contribution years or 37.5 insurance years. Insurance years comprise both contributing years (perios of employment, incluing sickness, an maternity leave) an qualifying years (perios of unemployment, military service, or seconary eucation). Eligibility criteria are relaxe for iniviuals who have been unemploye for at least 12 months in the past 15 months. They only nee 15 contribution years to qualify for an ol-age pension at the early retirement age of 60 for men an 55 for women. The amount of an ol-age pension is etermine by the assessment basis an the pension coefficient. The assessment basis correspons to the average earnings of the best 15 years after applying an earnings cap in each year. The pension coefficient correspons to the percentage of the assessment basis that is replace by the ol-age pension. An ol-age pension replaces on average 80% of the last net wage after subtracting income taxes an manatory health insurance contributions. The Austrian DI program grants relaxe access to DI benefits from age 55. This resembles the isability screening process in the Unite States, where stanars are relaxe iscontinuously at age 55 (Chen an van er Klaauw, 2008). More specifically, Austrian applicants below age 55 are eligible for DI benefits if a meical impairment reuces the capacity to work by at least 50 percent in any occupation. Applicants above age 55 are classifie as isable if their work capacity is reuce by more than 50% in the same occupation. Due to this relaxation in eligibility criteria, isability enrollment raises significantly at age DI benefits are calculate in the same way as ol-age pensions, except for a special increment that is grante to claimants below age 55. Postponing a DI benefit or an ol-age pension claim by one year increases the replacement rate by roughly 2 percentage points. The UI system is an important pathway into early retirement because oler unemploye are eligible for extene UI benefits. Regular UI benefits are a function of annual earnings one or two years before unemployment entry (epening on the starting month of the UI spell). The net 8 In 1996, the age limit for relaxe access to isability pensions was raise to age 57, for an evaluation of this policy change, see Staubli (2011). All iniviuals that are consiere in the empirical analysis below, were subject to pre-1996 isability pension rules. 4

6 replacement rate eclines with previous earnings from a maximum of aroun 60% for low-income earners to approximately 50% for high-income earners. On top of regular UI benefits, family allowances are pai. Regular UI benefits can be claime for a limite perio base on previous work history. Iniviuals who have worke 1 year or more in the last 2 years receive benefits for 20 weeks, while those with at least 3 years of employment in the past 5 years receive benefits for 30 weeks. Job losers age 50 an oler who have pai UI contributions for 9 years or more in the last 15 years can claim UI benefits for 52 week. 9 Job losers who exhaust the regular UI benefits can apply for unemployment assistance. These means-teste transfers last for an inefinite perio an are about 70% of regular UI benefits. In aition, unemploye men age 59 or oler can claim special income support, provie that they have contribute to the UI program for at least 15 out of the previous 25 years. Special income support is equivalent to an UI spell in legal terms, but with 25% higher benefits. Benefits are pai for a perio of 12 months to brige the gap until iniviuals become eligible for an ol-age pension. The rules are more generous for workers in the mining sector who can claim special income support for up to 5 years starting at age 55. Special income support can be combine with regular UI benefits an unemployment assistance. Thus, eligible unemploye can claim UI benefits up to age 59 followe by special income support. Notice that UI benefits epen only on earnings in the previous job, while DI benefits an ol-age pensions are base on the entire work history. Thus, an iniviual s replacement rate of a DI benefit or an ol-age pension can be very ifferent from the replacement rate of UI benefits. For example, an unemploye worker with pre-unemployment earnings higher than his or her life-time earnings will have relatively high UI benefits compare to DI benefits or ol-age pensions. As a consequence, job losers with otherwise similar characteristics may have quite ifferent incentives to retire early. 2.2 The Regional Extene Benefit Program an Retirement Pathways To preclue Soviet appropriation after Worl War II, Austria nationalize its iron, steel, an oil inustries, an relate heavy inustries. After the mi-1970, the state-run company Österreichische Inustrie AG, in charge of aministrating the nationalize firms, face shrinking markets ue to the international oil an steel crisis, low prouctivity, an outate smokestack inustries. Before 1986, financial losses were covere by governmental subsiies, but in 1986 a speculation scanal in the steel inustry triggere the abolishment of this protectionist policy. A new management was appointe that implemente a strict restructuring plan. This process cause layoffs an ownsizing of prouction plants, particularly in the steel inustry. To protect oler workers against averse labor market conitions in the steel inustry, the Austrian government enacte the Regional Extene Benefit Program (REBP) in June The 9 Before August 1989, the potential unemployment uration was 30 for all iniviuals above age 50. See Lalive et al. (2006) for a etaile escription of the policy change an its impact on the unemployment uration of job losers. 5

7 program extene the potential unemployment uration from 52 weeks to 209 weeks for a subgroup of workers. To become eligible for the benefit extension an unemploye worker ha to satisfy each of the following criteria at the beginning of the unemployment spell: (i) age 50 or oler, (ii) continuous work history (15 years of employment in the past 25 years), (iii) location of resience in one of the eligible regions for at least 6 months prior to unemployment entry, an (iv) start of a new unemployment spell after June 1988 or spell in progress in June The REBP was initially implemente in 28 regions. The minister for social affairs, a member of the ruling social emocratic party (SPÖ), was in charge of selecting the regions that were inclue in the program. While the recors of the meetings in which the set of regions eligible to the program was ecie upon are not open to the public, Lalive an Zweimüller (2004b) show that eligible regions were characterize by a relatively high share of employment in the steel sector (aroun 17% in REBP regions versus roughly 5% in non-rebp regions). 10 However, they fin no ifferences in the unemployment rate or the fraction of long-term unemploye between treate an non-treate regions. In January 1992 a reform became effective that abolishe the benefit extension in six of the originally 28 regions. The 1992 reform also tightene eligibility criteria, as iniviuals ha to be not only resients, but also previously employe in a REBP region. We label the set of treate regions that were exclue after the reform as TR1s. In the remaining 22 regions the REBP was in effect until August 1993 when it was abolishe entirely. We label the regions that kept eligibility after the reform as TR2s. The regions that were never entitle to the REBP are labele as CRs. Figure 1 plots the istribution of REBP across the 2,361 communities in Austria. The figure illustrates that TRs (communities with blue or ark-blue shaing) are all locate on a contiguous area in the Eastern an Central parts of Austria. Control regions (CRs) Treate regions 1 (TR1s) Treate regions 2 (TR2s) Figure 1: Regional istribution of REBP eligibility 10 The ultimate ecision on set of regions that became eligible to the program was heavily criticize by opposition parties an meia as being biase towars the clientele of the ruling parties. 6

8 The introuction of the REBP ramatically change early retirement incentives for oler unemploye men, as illustrate in Figure 2. Without the REBP oler unemploye men coul withraw from the labor force at age 58 an brige the gap until the eligibility age for an ol-age pension by claiming unemployment benefits for 12 months followe by special income support for 12 months. With the introuction of the REBP eligible unemploye men coul effectively withraw through the UI system at age 55. Thus, we expect that uring the REBP perio there will be an increase in the fraction of year ol unemploye who permanently exit the labor force by using the extene UI benefits as a brige to an ol-age pension. This is an example of a program complementarity effect: the more generous UI benefits increase the future take-up of other welfare-state programs. Notice that job losers above age 55 also have a higher incentive to claim a DI pension ue to relaxe eligibility criteria. It is very likely that some year ol unemploye men who woul have claime a isability pension without the REBP may instea have ecie to retire early via the UI system uring the REBP. This is an example of a program substitution effect: the more generous UI benefits reuce contemporaneous take-up of another program. Figure 2 also suggests that the REBP le to important changes in the early retirement incentives for unemploye men below age 55. More specifically, without the REBP unemploye men below age 55 coul withraw from the labor market at age 54 by claiming unemployment benefits for 12 months followe by a isability pension at age 55. With the introuction of the REBP this option was alreay available to unemploye men age 51 an oler. Thus, we expect that the REBP leas to a program complementarity effect among unemploye men younger than 55; some unemploye men who woul have returne to employment without the REBP may have instea use extene UI benefits uring the REBP as a brige to a DI pension. Figure 2: Early retirement pathways for unemploye men with/without REBP-eligibility Age Ol-Age Pension with REBP Special Income Support with REBP Relaxe Disability Pension Notes: Gray arrows enote maximum uration of regular UI benefits without REBP (1 year) an black arrows enote maximum uration of regular UI benefits with REBP (4 year). Unemploye men can withraw by claiming a isability pension at age 54 without the REBP an at age 51 with the REBP. Unemploye men can permanently withraw from the labor market by claiming an ol-age pension at age 58 without the REBP an at age 55 with the REBP. 7

9 3 Data an Descriptive Evience 3.1 Data We combine register ata from two ifferent sources. The Austrian Social Security Database (ASSD) provies etaile longituinal information on labor market an earnings histories of the universe of private-sector workers in Austria (Zweimüller et al., 2009). The secon source is the Austrian unemployment register, which contains information on the place of resience (community) an relevant socio-economic characteristics of registere unemploye workers. We consier all job separations of male workers age at the beginning of their UI spell between 1985 an These spells are then followe up until the en of We focus on men because women are alreay eligible for an ol age pension at age 55 (as oppose to age 60 for men), which is also the age for relaxe access to a isability pension. Hence, our empirical esign is useful to unerstan program complementarity an substitution for males but it is less relevant in the case of females. We exclue job losers who enter unemployment from a job in the steel sector because they may face worse labor market prospects in TRs ue to the steel crisis. 11 In our observation perio 216,246 unemployment spells were starte by men in the age group From these, we rop 13,595 unemploye men whose last job was in the steel sector. We also exclue 42,247 unemploye men with less than 15 employment years in the past 25 years. Only job seekers who satisfy this criterion are eligible for the REBP. This contribution requirement also guarantees that job seekers in our sample will be eligible for special income support at age 59 an for an ol-age pension at age 60. Because the Austrian labor market is characterize by large seasonal employment fluctuations (Del Bono an Weber, 2008), we exclue 80,892 men whose last two jobs were with the same employer. These job seekers are likely to be on a temporary layoff an o not face a trae-off between return to work an early retirement. We also rop 1,438 unemploye men who previously worke in the mining sector as this sector has more generous rules for special income support. The final sample thus comprises 78,074 unemployment spells. Panel A of Table 1 presents summary statistics on exit states after the unemployment spell by region of resience before (1/1985 5/1988), uring (6/1988 7/1993), an after the REBP (7/ /1995). The exit early retirement comprises exits to isability pensions, ol-age pensions, an censore spells. Before the REBP the probability to retire early (return to work) is 5.3 percentage points higher (lower) in TRs relative to CRs because job losers in TRs are more likely to exit unemployment by claiming a DI pension. During the REBP the ifference in the probability to retire early increases to 29.3 percentage points. This increase is primarily riven by an increase in the share of job losers in TRs who claim a isability or an ol-age pension at unemployment exit. 11 The steel crisis may have affecte job prospects of unemploye men in TRs whose last job was not in the steel sector through spillover effects. In the next section we will iscuss how we aress this concern in the empirical analysis. 8

10 After the abolishment of the REBP, the ifference in the incience of early retirement between TRs an CRs ecreases again to the pre-rebp level, suggesting that the program ha no long-lasting effects on the labor supply of unemploye men. Notice also that over the observation perio there is an increase in the incience of early retirement an isability enrollment in all regions, which likely reflects a general eterioration in labor market conitions for oler workers an/or an increase propensity to retire early. Panel B of Table1 shows that before an after the REBP job losers in TRs are somewhat less eucate an are more likely to have worke in blue-collar occupations an the manufacturing inustry than job losers in CRs, but overall the backgroun characteristics are remarkably similar. During the REBP there are more apparent ifferences in backgroun characteristics. More specifically, job losers in TRs are more likely to have worke in the machine inustry, have earne higher wages, an have more tenure compare to job losers in CRs. This pattern is consistent with a stuy by Winter-Ebmer (2003) who argues that firms use the REBP to get ri of high-tenure an expensive oler workers. Table 1 also illustrates that uring the REBP there is a significant increase in unemployment inflow in TRs relative to CRs. The ratio of unemployment spells in TRs versus CRs is roughly 1 to 4 before an after the REBP; this ratio increase to aroun 1 to 2.5 uring the REBP. In Section 5 we will examine the impact of the REBP on unemployment inflow in more etail. 3.2 Descriptive Evience To graphically assess the impact of extene UI benefits on early retirement behavior, Figure 3 plots the fraction of transitions from unemployment into early retirement (Panel A), isability pensions (Panel B), an ol-age pensions (Panel C) by age at UI entry an region of resience before, uring, an after the REBP. Early retirement comprises exits to isability an ol-age pensions as well as job losers who stay unemploye until the en of Panel A of Figure 3 shows that both before an after the REBP transition rates into early retirement are very similar in TRs an CRs at all ages. The transition rate peaks at age 58, which is the earliest age that allows for a permanent exit from the labor market through the UI system in the absence of the REBP (see Figure 2). During the REBP is in effect, the transition rate into early retirement between ages is aroun 30 percentage points higher in TRs, inicating that a significant portion of unemploye men uses the extene UI benefits to permanently exit the labor force. For the age group there are only small regional ifferences in early retirement rates uring the REBP because unemploye men in this age group can rely on regular UI benefits an special income support to retire early. Panel B of Figure 3 shows that the transition rate into isability pensions is slightly higher in TRs before an after the REBP, perhaps reflecting some unerlying regional ifferences in the characteristics of unemploye men. For example, Table 1 shows that job losers in TRs are more 9

11 Table 1: Sample statistics in treate (TRs) an control regions (CRs) before, uring, an after REBP Before REBP During REBP After REBP CRs TRs CRs TRs CRs TRs A. Exit state after UI (%) Employment Early retirement Disability pension Ol-age pension Censore B. Backgroun characteristics Age at UI entry Sick ays Marrie Daily wage Blue collar Experience (years) Tenure (years) Eucation Low Meium High Inustry Agriculture Wholesale an retail trae Manufacturing Machines Construction Services No. of Obs. 14,894 3,843 27,003 9,762 18,123 4,449 Notes: Before enotes unemployment spells starting in January 1985 to May During enotes unemployment spells starting in June 1988 to July 1993 (December 1991 in TR1s). After enotes unemployment spells starting in August 1993 (January 1992 in TR1s) to December Sick ays is the sum of ays spent in sick leave prior to unemployment entry, experience enotes work experience in the last 13 years, an tenure refers to tenure in last job. Daily wage is ajuste for inflation. 10

12 likely to work in blue-collar occupations an ten to be less eucate. Both factors are associate with a higher isability risk. During the REBP perio, there is a striking increase in transitions into isability pensions between ages in TRs, suggesting that extene UI benefits serve as a brige to a isability pension for some unemploye men in this age group (program complementarity). For the age group there is evience of a program substitution effect, given there is a sizable ecline in transitions into isability pensions in TRs relative to CRs. Put ifferently, the REBP inuces some unemploye men who in the absence of extene UI benefits woul have claime a isability pension to stay unemploye until they become eligible for an ol-age pension. This substitution away from isability pensions is also reflecte in Panel C of Figure 3, which shows that the transition rate into ol-age pensions is significantly higher between ages in TRs uring the REBP is in effect (program complementarity). As we will iscuss in more etail in the next section, our empirical approach to evaluate the impact of the REBP relies primarily on the assumption that UI exits woul have followe similar trens in TRs an CRs in the absence of the REBP. To she light on this assumption, it is useful to compare trens in transitions into ifferent exit states in TRs an CRs over time. Such a comparison is particularly important in our context, given that the REBP was implemente in regions with a strong steel sector that were particularly affecte by the steel crisis. Importantly, averse labor market conitions in the steel inustry may have ha local spillover effects into other inustries, which woul violate the assumption unerlying our empirical approach. Figure 4 illustrates how transitions into early retirement, isability pensions, an ol-age pension for the age groups an evelop over time by region. UI spells in TRs that starte after November 1988 (first vertical line) coul potentially benefit from the REBP, given that UI spells in progress when the REBP was implemente (secon vertical line) were also eligible. The thir an the forth vertical line enote the ates when the REBP was abolishe in TR1s an TR2s, respectively. For both age groups transition rates into ifferent exit states are very similar in TRs an CRs before the secon half of 1987, suggesting that the steel crisis ha only little impact on other inustries in TRs. In the secon half of 1988, the perio when the REBP starte, transitions rates start to iverge. For the age group there is a program complementarity effect; transition rates into early retirement, isability pensions, an (to a smaller extent) ol-age pensions increase in TRs relative to CRs. For the age group there is a program substitution an a program complementarity effect; transitions into isability pensions ecline an transitions into ol-age pensions increase isproportionately so that overall transitions into early retirement increase. After the secon half of 1993, when the program was abolishe, the effects of the REBP are reverse an regional ifferences in transition rates are relatively small again. Notice also that transitions into early retirement in the age group start to increase in TRs alreay one year before the REBP, suggesting that some job losers who were alreay unemploye when the REBP was implemente took avantage of the REBP to retire early. 11

13 Figure 3: Transitions into early retirement (Panel A), isability pensions (Panel B), an ol-age pensions (Panel C) by age in treate (TRs) an control regions (CRs) before, uring, an after REBP Before REBP A. Early retirement During REBP After REBP Fraction Fraction Fraction Age at UI entry Age at UI entry Age at UI entry CRs TRs CRs TRs CRs TRs Before REBP B. Disability pension During REBP After REBP Fraction Fraction Fraction Age at UI entry Age at UI entry Age at UI entry CRs TRs CRs TRs CRs TRs C. Ol age pension Before REBP During REBP After REBP Fraction Fraction Fraction Age at UI entry Age at UI entry Age at UI entry CRs TRs CRs TRs CRs TRs Source: Own calculations, base on Austrian Social Security Data. 12

14 Figure 4: Trens in transitions into early retirement, isability pensions, an ol-age pensions in treate (TRs) an control regions (CRs) by year an age group A. Ages Early retirement Disability pension Ol age pension Fraction Fraction Fraction Year at UI entry Year at UI entry Year at UI entry CRs TRs CRs TRs CRs TRs B. Ages Early retirement Disability pension Ol age pension Fraction Fraction Fraction Year at UI entry Year at UI entry Year at UI entry CRs TRs CRs TRs CRs TRs Source: Own calculations, base on Austrian Social Security Data. 4 Ientification Strategy To estimate the causal effect of extene UI benefits on early retirement, we exploit the quasiexperimental variation in the uration of UI benefits across Austrian regions generate by the REBP. Our ientification strategy relies on a ifference-in-ifferences (DD) approach. The first ifference is over time, since the program was in effect only from June 1988 to July The secon ifference is across geographic areas; only oler job seekers living in one of the 28 selecte regions were eligible for the benefit extension. Because the REBP was only in effect for a limite perio of time, we are able to test whether the policy effects of introucing an abolishing extene UI benefits are symmetric. The ifference-in-ifferences comparison is implemente by estimating regressions of the following type y it = α + β(d t T R i ) + γ(a t T R i ) + λ t + η i + X itδ + ε it, (1) where i enotes iniviual an t is the start ate of the unemployment spell. The outcome variable y it is a ummy, which is equal to 1 if an iniviual leaves unemployment into the exit state of 13

15 interest an 0 otherwise. We istinguish between three ifferent types of exits: early retirement, isability pension, an ol-age pension. The variable T R is an inicator taking the value 1 if an iniviual lives in a treate region; D is an inicator taking the value 1 if the unemployment spell starte uring the REBP (June 1988 until December 1991 for TR1s; an June 1988 until July 1993 for TR2s); an A is an inicator taking the value 1 if the unemployment spell starte after the REBP was abolishe (January 1992 or later in TR1s; an August 1993 or later in TR2s). We inclue labor market region fixe effects (η i ) to control for region-specific ifferences, year-quarter fixe effects (λ t ) to control for macroeconomic conitions, an a set of backgroun characteristics (X it ) to control for observable ifferences that might confoun the analysis. 12 Remember that UI spells in progress at the time of the REBP implementation were also eligible for the extene UI benefits. This rule implies that UI spells that starte less than 30 weeks (November 1987) before the REBP were potentially eligible. To capture the impact of the REBP on UI spells in progress, we inclue an inicator for UI spells in TRs that starte between November 1987 an May The coefficients of interest in equation (1) are β an γ which measure the effect of the REBP on oler job losers in TRs relative to CRs in the years when the program was in effect relative to before its implementation (β) an in the years after the program was abolishe relative to uring the program (γ). Clearly, if the introuction an abolishment of the REBP have symmetric effects on the outcome variable of interest we have β = γ. Equation (1) is estimate separately for the age groups an because the impact of the REBP on early retirement behavior is likely to be very ifferent for both groups. In particular, job losers in the age group may use the REBP to brige the gap until age 55 when conitions for isability classification are relaxe. Job losers in the age group can irectly apply for a isability pension uner the relaxe eligibility criteria, but may use the REBP instea to brige the gap until age 60 when they become eligible for an ol-age pension. The central ientifying assumption is that trens in the outcome variable in CRs are informative on the counterfactual in the absence of the REBP. This assumption implies that there are no omitte time-varying an region-specific effects correlate with the program. There are some concerns about the valiity of this assumption, given that the motivation behin the implementation of this policy was to provie a better protection to oler unemploye in regions with a strong steel sector an it is possible that the steel crisis may have ha spillover effects to other inustries in TRs. Such iiosyncratic shocks to TRs woul violate the ientifying assumption an lea to an upwar bias in the estimates. We run several robustness checks to test for this possibility. First, the availability of ata from several years pre- an post-rebp allow us to examine the importance of spillovers from the steel sector affecting the entire region. In particular, labor market trens in TRs an CRs shoul move in parallel in the absence of spillover effects from the steel sector. The graphical analysis from the previous section suggests that transition rates into ifferent exit states are similar in TRs an CRs prior to the inception of the REBP an after its 12 Backgroun characteristics are age-in-year ummies, marital status, blue-collar status, eucation, work experience, years of service, sick leave history, last wage, previous inustry, quarter of UI benefit claim, an ummies for weeks of UI eligibility (30, 39, 52 weeks). 14

16 abolishment. To examine the existence of ifferential trens across regions in more etail, equation (1) is generalize by replacing (D t T R i ) an (A t T R i ) with a full set of treatment times half-year interaction terms: y it = α h2 j=1985h1 π j ( jt T R i ) + λ t + η i + X itδ + ε it, (2) where jt is a ummy that equals 1 if the unemployment spell (t) starts in half-year j an 0 otherwise. Here, we set T R equal to 0 in TR1s after the reform of the REBP in December Each coefficient π j can be interprete as an estimate of the impact of the policy change on the treatment group relative to the control group in a given half-year relative to the baseline half-year (1987h1). The interaction terms provie tests for anticipatory behavior an ifferential trens. The coefficients π j shoul be zero prior to the secon half of 1988 an after the first half of 1993, if the REBP was an exogenous an unanticipate policy. As a secon robustness test to examine the presence of region-specific labor market shocks, we restrict attention in the estimation to unemploye men who live no farther than a 30 minutes car rive from the borer between TRs an CRs. The iea behin this approach is that job losers living close to the borer are likely to operate in the same local labor market. Hence, labor market shocks shoul affect treate an non-treate job losers in the same way. However, this approach is potentially problematic if the REBP affects employment opportunities of job losers living in CRs close to the borer ue to reuce competition for jobs. Such spillover effects to non-treate workers woul violate the assumption that trens in CRs are informative on the counterfactual. To examine whether the REBP ha an effect on non-treate job losers, we estimate equation (1) for job losers in the age groups an Because these iniviuals were not eligible for the REBP (age group 45-49) or i not nee the REBP to retire early (age group 58-59), the estimate coefficients shoul be zero; any statistical significance woul inicate irect spillover effects from treate to non-treate iniviuals. As a thir robustness test we estimate equation (1) for a sample of job losers who previously worke in the traable-goos sector with the exception of inustries that are irectly linke with the steel sector (iron an steel prouct manufacturing). The iea behin this approach is that labor eman prospects in the traable-goos sector are less influence by local economic conitions. Hence, potential spillovers effects from the steel sector to non-steel sectors shoul be less important. Moreover, this approach is less susceptible to externalities of the REBP on non-treate iniviuals, because treate an non-treate iniviuals are less likely to operate in the same local labor market. Another threat to the valiity of our ientification strategy is the possibility that the more generous unemployment rules change the composition of unemployment inflow in TRs, which may lea to a selection bias. Table 1 provies some evience that selection may occur given that uring the REBP perio unemployment inflow increases in TRs relative to CRs an job losers in TRs are more likely to have worke in the machine inustry in their last job, have earne higher wages, an have more tenure than job losers in CRs. We follow a two-stage approach to ascertain 15

17 that selective inflow oes not affect our results. In the first stage, we estimate the impact of the REBP on UI inflow rates for ifferent subsamples of the population using the same specification as in equation (1). This allows us to ientify a subsample of unemploye men whose layoff was likely exogenous. In the secon stage, we examine the impact of the REBP for this subsample of job losers. 5 Results 5.1 Main Results The first set of results is summarize in Table 2, with columns 1 through 3 proviing the results from equation (1) for the age group an the next three columns isplaying the analogous results for the age group The epenent variable is an inicator, which is equal to 1 if an iniviual exits unemployment through the state in question an 0 otherwise. Consistent with the graphical evience from Figure 3, the first row inicates that the REBP increase the probability of entering early retirement among year ol unemploye men by 16.2 percentage points, or 61% of the baseline transition rate into early retirement in the pre-rebp perio. This ecline is mostly riven by an increase in transitions into isability pensions of 12.2 percentage points (column 2) an to a lesser extent by an increase in transitions into ol-age pensions of 3.4 percentage points (column 3). These estimates suggest that unemploye men in this age group use the benefit extension to brige the time until the become eligible for a isability or an ol-age pension (program complementarity). The thir row shows that the effects on transitions from unemployment into ifferent exit states are completely reverse after the program is abolishe. The effect on transitions into isability pensions is somewhat smaller in absolute value, but the ifference is statistically not significant. Columns 4 to 6 present analogues estimates for the age group who was never eligible for the REBP. The point estimates are small an insignificant, suggesting that the REBP i not affect early retirement behavior of non-eligible job losers. The variable anticipation effects captures the impact of the REBP on UI spells that starte up to 30 weeks before the REBP but were potentially eligible for extene UI benefits given that spells in progress were also eligible for the REBP. The coefficient estimates are insignificant an very small in magnitue, reflecting that this policy was not anticipate by job losers. The increase inflow into isability pensions by year ol job losers in TRs shoul occur mostly after age 55, because eligibility criteria for a isability pension are very strict before age 55. We estimate two versions of equation (1) to investigate at which age unemploye men claim a isability pension. In the first version, the epenent variable is an inicator taking the value 1 if a year ol job loser claims a isability pension before age 55. In the secon version, the epenent variable is an inicator taking the value 1 if a year ol job loser claims a isability pension after age 55. Table 3 shows that the REBP has only little impact on the claiming of a 16