THE CAUSES AND CONSEQUENCES OF UNEMPLOYMENT COMPENSATION

PROGRAM GENEROSITY: WHAT DO WE LEARN FROM CROSS-NATIONAL

ANALYSES?






Michael R. Smith and Heather Zhang
McGill University













THE CAUSES AND CONSEQUENCES OF UNEMPLOYMENT COMPENSATION
PROGRAM GENEROSITY: WHAT DO WE LEARN FROM CROSS-NATIONAL
ANALYSES?


Abstract

Interest in unemployment compensation transcends disciplinary boundaries. Research on it deals
with both the sources of relative generosity in national systems and the consequences of that
generosity for work incentives and the incidence of poverty. A significant proportion of the
research on these subjects involves cross-national analyses using data sets from the OECD on the
components of the unemployment compensation system. In this paper we examine the adequacy
of the data used for the purposes to which it is put - and find it seriously wanting in several
respects.

Keywords: Unemployment compensation; Cross-national analysis; OECD; Welfare State

As part of a broader interest in welfare states, the relative generosity of unemployment

compensation schemes across countries is a matter of research interest within several disciplines.

Below are six hypotheses drawn from economics, sociology, and political science accompanied

by the publications within which the hypothesis is tested (and sometimes rejected). In the first

four generosity is an independent variable, in the last two a dependent variable.

Generous unemployment compensation reduces the cost of staying unemployed and the
reticence of employees to demand wages that exceed their productivity. It also limits
productivity by reducing the costs of being dismissed for cause. Consequently, countries
with generous unemployment compensation systems have higher rates of unemployment
(Nickell, 1997; Nickell et al., 2003; Lindert, 2004: 106-110; Nickell et al., 2005;
Nunziata, 2005).
1
Generous unemployment compensation has led to an increase in unemployment because
it reduces the capacity of an economy to respond to adverse shocks (Blanchard, 1998;
Blanchard and Wolfers, 2000 - hereafter, B&W). Factor productivity growth slowed in
the 1970s but wages continued to grow robustly in countries with generous programs. As
a result, profit rates and the share of capital fell. Employers responded by reducing
employment. Then, in the context of a broader set of institutions that protect employees -
including, in particular, employment protection legislation, adopted labour-minimizing
production techniques. Unemployment in the countries affected, then, rose and remained
high.
2
This account differs from that of Nickell et al. by arguing that it was the
combination of generous institutions and productivity shocks that caused a deterioration
in labour market conditions in some countries, rather than institutions alone.
For the reasons laid out by Nickell in his discussions of unemployment compensation and
unemployment rates, generous benefits also reduce the rate of growth in employment.
Employment is a major route out of poverty so this may mean that the incidence of
absolute poverty is higher in countries with generous benefits (Kenworthy, 2004).
Countries poverty thresholds are usually relative - some fraction of the median, for
instance. A country with generous benefits may reduce relative poverty but, if the cost of
that is low employment growth that country may have a high incidence of absolute
poverty, which involves a comparison of the living standards of the poor with, in
Kenworthys case, a purchasing power parity adjustment.
By protecting people against catastrophic income loss more generous unemployment
compensation reduces both relative and absolute poverty (Scruggs and Allan, 2006a).
3

Globalization, in the form of increased trade and capital mobility, disrupts rich country
economies and leads to rising unemployment. This puts pressure on government budgets
and, in turn, on welfare state generosity, including the generosity of unemployment
compensation (Iversen, 2001).
4

Politics influence welfare state generosity, including unemployment compensation.
Confronted with budgetary difficulties (probably caused by globalization), governments
of the left have been less likely to cut benefits than have those of the right (Korpi and
Palme, 2003; Allan and Scruggs, 2004).
For our purposes what is important is that each of the sources listed above tests its
hypothesis using cross-national aggregate data.
5
In what follows we examine problems in the
measures used to test theories of the consequences and causes of unemployment compensation
generosity. It is likely, however, that problems like those we discuss are more generally present

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across other areas of comparative research that rely on indicators drawn from publications of
international organizations, like the OECD.
Now, to a very substantial degree, the studies summarized above generate contradictory
results. Consider, first, the analyses that treat unemployment compensation generosity as an
independent variable. Nickell and his various collaborators have concluded that their hypothesis
is supported. Institutions, including unemployment system generosity, have led to poor labour
market performance including persistently higher rates of unemployment in some (particularly
continental European) countries. In drawing this conclusion they explicitly reject Blanchards
hypothesis - that institutions, including unemployment compensation generosity - only damaged
labour market functioning by changing the responses to adverse shocks. B&W, however,
concluded from their analysis that Blanchards hypothesis is correct.
6
Kenworthy concludes that
generous unemployment compensation does not reduce employment growth, which is
inconsistent with both Nickell et al. and B&W.
7
Finally, Scruggs and Allen conclude that
unemployment compensation program generosity neither reduces nor increases the incidence of
absolute poverty. This does not directly contradict Nickell or B&W, but it does raise the
question, why do the pernicious labour market effects they identify not have substantial effects
on living standards?
Turning to analyses that treat unemployment compensation generosity as a dependent
variable, Iversen found that globalization did not lead to retrenchment of various forms of
welfare state generosity, including unemployment compensation. Korpi and Palme as well as
Allan and Scruggs concluded the opposite - that globalization has led to welfare state
retrenchment, unemployment compensation included, but that countries with left governments

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retrench less.
Within the social sciences there is nothing novel or surprising about inconsistent results.
Inconsistent findings are possible for a number of reasons: different model specification (where
relevant), different samples, different time periods analyzed, and different data sources. At first
sight, this last factor should not be relevant in the evaluation of these studies. They all rely on the
same OECD data source, most studies focus their analysis on the same 18 countries, and use the
same two generosity indicators: the replacement rate (post-job loss benefits as a percentage of
pre-job loss earnings) and benefit duration (the period of time over which some level of benefits
is received). Some researchers have supplemented these two basic measures. Nickell, Nunziata,
and Ochel (2005: 5) recently added an index of strictness of benefit conditions, borrowed from a
Danish Ministry of Finance publication. Allan and Scruggs include the qualifying period for
benefits, the number of days delay after job-loss before benefits can be collected, and the percent
of the labour force covered by benefits - which they have then condensed into a single indicator
of unemployment benefit generosity (Scruggs and Allan, 2006a: 892).
8

A common data source, largely identical samples, and substantially overlapping measures
might be expected to produce similar results. Why do they fail to do so in this body of research?
We provide an answer to this question and, in doing so, explore some serious flaws in the indices
used and, by extension, in this entire research genre.
9
The flaws that we explore originate in,
first, the failure of the indices used to capture pertinent system complexity and, second, the
failure to consider the implications of differences in the character of unemployment across
national labour markets - in particular, differences in unemployment durations.



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SYSTEM GENEROSITY: COMPONENTS AND COMPLEXITY

Replacement rates

B&W opined that The OECD measure is a summary measure of the replacement rate,
and in some ways, not a very attractive one (2000: C14). After that transitory moment of self-
doubt they promptly and sufficiently recovered to process their data using the measure, and
publish the results.
Table 1 provides initial cause for concern. It contains the replacement rates and the
benefit durations used in three of the studies cited above, those of Nickell, B&W, and Scruggs
and Allan. Ignore the information on benefit durations for the time being. The data are for 1995
because that is the most recent year for which rates are available for all three studies. The data are
from these researchers and not others because each makes his data available on a web site.
10

Despite the fact that they all originate with the OECD, some of the rates diverge in
interesting ways. This is because they are constructed differently. Nickells is pre-tax, averaged
over household types for the first year of unemployment. B&Ws is a maximum pre-tax rate
averaged over all household types and durations of unemployment, up to five years. Scruggs and
Allan present post-tax individual and family replacement rates - the latter for an employee with a
dependent spouse and two dependent children. The final rate, the one used in their analyses, is
the average of the individual and the family rates. For all three sources the denominator is the
average production worker wage.
Compare Nickells numbers with those of B&W. Because they provide a maximum in all
but three cases B&Ws exceed the replacement rates reported by Nickell.
11
More interesting is
the fact that the magnitudes of the differences between country scores vary substantially. If,

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TABL E 1
ALTERNATIVE, OECD-BASED, UNEMPLOYMENT COMPENSATION MEASURES, 1995

Replacement Rates Benefit Durations
Nickell B&W Scruggs and Allan Nickell B&W Scruggs and Allan
Individual Family Average
Australia 0.270 0.375 0.298 0.662 0.480 1.020 4.000 no limit
Austria 0.310 0.550 0.570 0.726 0.648 0.750 3.000 0.580
Belgium 0.460 0.600 0.650 0.607 0.628 0.760 4.000 no limit
Canada 0.580 0.595 0.636 0.698 0.667 0.210 0.750 0.730
Denmark 0.610 0.900 0.649 0.684 0.667 1.000 2.500 7.000
Finland 0.590 0.690 0.629 0.742 0.686 0.540 3.000 1.920
France 0.580 0.570 0.723 0.639 0.681 0.510 3.375 2.500
Germany 0.360 0.630 0.600 0.689 0.644 0.600 4.000 1.000
Ireland 0.320 0.435 0.370 0.625 0.497 0.750 4.000 1.250
Italy 0.430 0.110 0.276 0.345 0.310 0.200 0.500 0.500
J apan 0.310 0.600 0.600 0.568 0.584 0.000 0.500 0.580
Netherlands 0.700 0.700 0.735 0.784 0.760 0.500 3.000 2.000
New Zealand 0.260 0.340 0.293 0.647 0.470 1.040 4.000 no limit
Norway 0.620 0.650 0.660 0.736 0.698 0.510 1.500 1.540
Sweden 0.680 0.800 0.797 0.822 0.810 0.040 1.200 1.150
Switzerland 0.630 0.700 0.734 0.850 0.792 0.160 1.000 0.960
UK 0.220 0.370 0.210 0.382 0.296 0.730 4.000 1.000
USA 0.270 0.500 0.579 0.593 0.586 0.160 0.500 0.500

TABLE 2
CORRELATIONS BETWEEN GENEROSITY INDICATORS, DIFFERENT PERIODS

Replacement Rates
1960-1995 1960-1969 1970-1979 1980-1989 1990-1995
B&W S&A B&W S&A B&W S&A B&W S&A B&W S&A
Nickell 0.50 0.76 Nickell 0.15 N/A Nickell 0.51 0.66 Nickell 0.80 0.84 Nickell 0.74 0.79
B&W 0.80 B&W N/A B&W 0.72 B&W 0.84 B&W 0.88

Benefit Durations
1960-1995 1960-1969 1970-1979 1980-1989 1990-1995
B&W S&A B&W S&A B&W S&A B&W S&A B&W S&A
Nickell 0.71 0.38 Nickell 0.68 N/A Nickell 0.70 0.23 Nickell 0.79 0.34 Nickell 0.77 0.55
B&W 0.22 B&W N/A B&W 0.16 B&W 0.24 B&W 0.27

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crudely, we treat a 20 point or greater difference as substantial then Austria, Denmark,
Germany, Japan, and the USA all cross that threshold. If we treat a 5 point or less difference as
small then only Canada, France, the Netherlands, and Norway have approximately coinciding
scores. The other cases diverge by intermediate amounts.
Now compare Scruggs and Allans tax-adjusted series to the other two. The average rates
of several of the distinctively less generous countries in the other two series improve markedly.
This is the case for Australia, New Zealand, and - even - the USA. Taxes, evidently, matter.
Their series also show that most countries treat families better than single individuals, but this is
most clearly the case for those that appear less generous in Nickells and B&Ws series -
Australia, Ireland, New Zealand, and the UK.
Table 1 shows that the replacement rates used in the literature diverge fairly substantially
and that sources of divergence are the effects of taxes and differential treatment of families in
less generous systems. How much of a difference does this make? Table 2 contains correlations
between the three replacement rate series (as well as the three benefit duration series, to which
we return shortly). In the first two periods the correlations vary between 0.15 and 0.72. In the
later two periods they vary between 0.74 and 0.88. By the standards of the social sciences, for
most pairs and most time periods the correlation is reasonably strong (the early 0.15 correlation
might be considered anomalous) - but it is equally clear that whatever is being measured differs
in important ways, sometimes substantially, across studies.
Is there any reason to have more or less confidence in one or another indicator?
Answering this question is difficult. In the relevant studies little discussion is provided of the
rationale for the particular replacement rate chosen.
12
The common thread that runs through these

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studies within different disciplines is the degree of income protection afforded by the program -
which might protect people against catastrophic falls in living standards or modify their
willingness to work, or both. Clearly, an after-tax rate of the sort provided by Scruggs and Allan
must be superior to the pre-tax indicators used by the other researchers. Beyond this, however,
there are three reasons to think that all of the indicators poorly reflect likely post job-loss living
standards: they oversimplify the programs they describe; the post job-loss transfers included are
not sufficiently inclusive; and the denominator - the average production worker wage - is
misleading. Consider these issues in turn.
Replacement rates are inferred from program rules. Cross-national regression and related
methods pretty much require a single replacement rate which, in turn, requires radical system
simplification. This is unfortunate because programs are typically complex. The rate depends on
earnings prior to the episode of unemployment. All systems have transfer maxima which cause
the replacement rate to fall as pre-unemployment earnings rise. We know that the incidence of
unemployment is higher among those with lower earnings. We also know that the distribution of
wages, like income, is skewed to the right. Consequently, it is likely that in most (perhaps all)
countries the bulk of those experiencing unemployment lost jobs that paid less than the average
industrial wage.
Also, the amount of the transfer usually varies with family type. People with dependents
typically receive more. So the households of individuals with the same pre-unemployment
earnings may receive different unemployment compensation because of differences in household
composition. The bottom line is that there is no single replacement rate. There are multiple rates
depending on pre job-loss earnings and family type. The use of rates averaged over family types

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obscures this.
The next problem with the standard measures originates in the fact that those losing jobs
may receive transfers in addition to unemployment compensation. Most countries provide a
range of income-contingent transfers including some or all of the following: family benefits,
housing benefits, child-raising allowances, as well as in-kind benefits like free school meals, free
public transport, and allowances for heating during cold periods. In the United States food
stamps have been of particular importance to job-losers (OECD, 2004: 127). This is not an
exhaustive list of possible transfers to the unemployed.
Table 3 illustrates the complexities summarized above. It presents estimated 2001
replacement rates during the first year of unemployment for those with low (two-thirds of the
average industrial wage) and high (50% greater than the average industrial wage) wages. (The
equivalent rates for those earning the average industrial wage are presented in a later table.)
These replacement rates are net of taxes and attempt to include as many as feasible of the cash
transfers that an unemployed person would receive. The figures are presented for 2001 rather
than 1995 because the OECD only began this detailed series in 1998, and has been subsequently
upgrading it. Note that the second earner in two-earner couples is assumed to earn two-thirds of
the average industrial wage.
A most basic lesson from Table 3 is that studies that use a single, average, replacement
rate, as is the case for most of the studies listed earlier, teeter on the edge of caricature. Even
adjusting for taxes, as (commendably) Scruggs and Allan do, still seriously oversimplifies.
In Nickells series Sweden is the most generous country. The decomposed rates in Table
3 show that while it remains a generous country it is not the most generous in any series and it is

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TABL E 3
OECD NET REPLACEMENT RATES BY RELATIVE WAGE AND FAMILY TYPE: INITIAL PHASE OF UNEMPLOYMENT
2001
67% Average Production Worker Wage 150% Average Production Worker Wage
No Children Two children No Children Two children
Single
One-
earner
couple
Two-
earner
couple Single
One-
earner
couple
Two-
earner
couple Single
One-
earner
couple
Two-
earner
couple Single
One-
earner
couple
Two-
earner
couple
Australia 48 42 53 60 79 68 25 22 36 42 52 48
Austria 55 58 80 75 78 86 55 56 72 65 66 76
Belgium 83 73 96 79 74 96 46 41 67 48 45 70
Canada 63 65 81 68 69 88 45 47 62 58 58 69
Denmark 85 91 93 96 96 93 45 52 64 61 61 66
Finland 74 81 81 89 87 86 48 54 66 67 65 70
France 83 87 92 91 91 92 70 69 79 70 69 79
Germany 63 61 90 89 82 99 62 51 80 78 70 91
Ireland 40 59 71 60 67 80 21 31 47 41 40 55
Italy 50 50 77 54 57 81 46 49 63 57 60 67
J apan 73 71 89 81 71 88 62 61 75 63 62 76
Netherlands 80 88 85 86 89 85 61 63 74 66 64 74
New Zealand 55 81 57 77 83 65 27 39 37 45 49 42
Norway 66 68 83 90 87 87 53 53 69 66 59 72
Sweden 82 82 91 92 90 92 56 56 71 69 61 72
Switzerland 79 79 89 81 81 90 72 71 80 82 82 87
UK 64 63 63 48 50 72 31 31 42 35 35 49
USA 62 63 81 53 53 83 42 41 59 40 39 63
Source: OECD (2 004)




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more generous with respect to those who had earned little prior to unemployment than to those
who had been well-paid. That pattern is even more marked for Denmark. For the low paid it is
about the most generous country. For the highly paid it slips to about the middle of the pack - not
much more generous than Canada.
13
Notwithstanding their adjustment for taxes Scruggs and
Allans series also misleads. New Zealand is distinctly mean in Scruggs and Allans listing (even
more so in Nickells). But Table 3 suggests that while New Zealands higher earners are treated
ungenerously, low earners with dependents are treated better - not as generously as their Swedish
and Danish counterparts, but the gap in their treatment is much narrower than the gap for, say, a
single low earner with no dependents or, even more so, than a single high earner with no
dependents. Australias pattern of transfers is similar.
Summary replacement rates, then, are misleading because they obscure system
complexity and because they usually fail to capture the range of transfers to which some job-
losers are likely to be eligible. A final problem is the choice of an appropriate denominator for
the rate. In an examination of pension replacement rates Whiteford (1995) shows just how
problematic is the standard replacement rate denominator. He describes the character of the series
at the beginning of the 1990s, which is a period analysed in the work summarized. Moreover, we
know from OECD (2004: 131) that many of the same difficulties persist.
The usual denominator, the average production worker wage, is the average weekly
wage of full-time male and female workers in manufacturing including average amounts of
overtime and cash supplements (e.g., Christmas bonuses, vacation payments) but excluding
fringe benefits (OECD, 2004: 131). Whiteford reports, however, some national data
eccentricities. The series from Belgium includes only men. The New Zealand sample includes

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white collar as well as production workers. Finland and Ireland include part-time as well as full-
time employees. In France and Finland the sample is drawn from mining as well as
manufacturing. It should not be assumed that these data eccentricities have negligible effects.
The OECD (2004:131), for example, estimates that the inclusion of white collar workers
increases the estimate of New Zealand wages by between 5 and 10%. Excluding women must
substantially increase the average level of pay in Belgium.
There is a larger problem. The wage averages provided are in important respects
misleading. The proportions of the workforce employed in manufacturing vary substantially
across countries as does the ratio of manufacturing to other wages. Consequently, the
representativeness of manufacturing wages varies. There is, moreover, a systematic tendency for
manufacturing wages to be lower where employer payroll taxes are higher (presumably because
in a more or less competitive market employers can pay higher wages or higher payroll taxes, but
not both). The consequence of this is that in countries like Sweden, Norway, and Finland, where
payroll taxes are high, the denominator of the replacement rate is smaller than in countries with
comparable levels of GDP per capita. In a country like Australia, where payroll taxes are low, the
denominator is much larger. Countries with different payroll taxes, then, may transfer similar
amounts to benefit recipients but have wildly different replacement rates. Whiteford (1995: 14)
estimated that a benefit that was equal to 36 per cent of the [average production wage] in
Australia could be regarded as identical to a benefit of around 50 per cent of the [average
production wage] in Norway, Finland or Sweden.
Three fundamental points emerge from this discussion of replacement rates. First,
notwithstanding the common OECD origin there are substantial divergencies between the

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country-specific rates used in the relevant literature. Second, even were one rate is superior to the
others - and Scruggs and Allans pretty clearly is superior to the others - a single country rate
cannot capture the complexity and range of transfers of real systems. Third, there are significant
technical problems with the denominator of the rates that the literature reviewed above largely or
entirely ignores.
Benefit duration
The right hand panel of Table 1 compares benefit duration scores across the 18 countries.
Again the scores vary because they are constructed in different ways. B&W have the most
straightforward indicator: the duration of benefits reported by the OECD, in years (to a maximum
of 4). This indicator suggests that Italy, Japan and the USA provide half a year of benefits
whereas Australia, Belgium, Germany, Ireland, New Zealand, and the UK provide four (or more)
years. The problem with this approach is that in most systems benefits tend to fall over time. The
major fall usually occurs when the recipient is switched to a means-tested benefit. Scruggs and
Allan take this event into account. Theirs is a weeks of benefit measure confined to the period
during which benefits are not means-tested.
14
Nickell takes yet other approaches. In his seminal
1997 paper he reported benefit durations in years (a minimum of 0.5 to a maximum of 4). More
recently (Nickell, Nunziata, and Ochel, 2005: 4) he expresses the benefits received in years 2 to 5
of unemployment as a percentage of the first year benefits, with more weight put on the benefits
received in years 2 and 3 than on those received in years 4 and 5.
As the bottom panel of Table 2 shows, the three researchers generate quite divergent
estimates of benefit durations. The correlations between the measures of B&W and Scruggs and
Allan are particularly low (a minimum of 0.16 for 1970 to 1979 to a maximum of 0.27 for 1990

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to 1995). The correlations between Nickells estimates (using his 1997 measure) and those of
Scruggs and Allan are not very strong (a minimum of 0.23 for 1970-1979 to a maximum of 0.55
for 1990-1995. The correlations between those of B&W and of Nickell are quite strong - around
0.70 to 0.80 - but far from perfect.
Further evidence on the effects of divergent measurement of both benefit duration and of
replacement rates is provided in Table 4. We re-estimated the equations for which unemployment
rates (aggregate, long, short) are the dependent variables described in Nickell (1997) replacing
his rates and benefit durations with those of Scruggs and Allan. The first column of coefficients
is drawn from Nickell (1997) and the last two were generated using two applications of Scruggs
and Allans measures. There is a problem in the assignment of benefit duration scores for
Australia and New Zealand: in neither country are benefits cut after some number of months (in
principle) because in each country job-losers directly enter the welfare system. In the first
specification we assign the maximum score in Scruggs and Allans series (8.5 years). In the
second, given the inherent ambiguity of the two cases, we drop them altogether.
In the relevant tables in his 1997 paper Nickell included the estimated coefficients and
their standard errors. He did not present either Z scores or p-values. In Table 4, for purposes of
comparison with Nickell we include standard error but add the corresponding Z-scores. For
significance at the 0.05 level or less a Z-score of at least 2 is required.
Turning to the actual results, note that in Nickells specification only total unemployment
is significantly affected by the replacement rate and long term unemployment by the benefit
duration.
15
When we substitute Scruggs and Allans measure, with or without Australia and New
Zealand, the Z-scores for both program measures fall below 2 and the coefficients become

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TABLE 4
GLS RANDOM EFFECTS MODELS OF THE EFFECT OF INSTITUTIONS ON LABOUR MARKET OUTCOMES:
NICKELL'S (1997) MODEL AND VARIOUS REPLICATIONS

Nickell
(1997)
Nickell
replicated
Scruggs
and Allan
Scruggs and Allan
(Australia and New
Zealand dropped)
Log Total Unemployment Replacement rate 0.011 0.012 0.014 0.017
(Standard error) (0.005) (0.005) (0.008) (0.009)
(Z-score) (2.200) (2.400) (1.750) (1.889)
Benefit duration 0.088 0.080 0.044 0.053
(Standard error) (0.055) (0.051) (0.048) (0.069)
(Z-score) (1.600) (1.569) (0.917) (0.768)
Log Long-Term Unemployment Replacement rate 0.011 0.013 0.012 0.005
(Standard error) (0.008) (0.008) (0.012) (0.013)
(Z-score) (1.375) (1.625) (1.000) (0.385)
Benefit duration 0.250 0.210 0.100 0.170
(Standard error) (0.089) (0.086) (0.063) (0.081)
(Z-score) (2.809) (2.442) (1.587) (2.099)
Log Short-Term Unemployment Replacement rate 0.011 0.010 0.011 0.017
(Standard error) (0.006) (0.006) (0.008) (0.010)
(Z-score) (1.833) (1.667) (1.375) (1.700)
Benefit duration 0.043 0.028 0.018 0.019
(Standard error) (0.062) (0.058) (0.053) (0.078)
(Z-score) (0.694) (0.483) (0.340) (0.244)
Other variables entered: employment protection, active labour market policies, union density, union
coverage index, union-employer coordination, total tax rate, change in inflation, period dummy.









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insignificant in all but one equation - benefit duration has a significant effect on long term
unemployment where Australia and New Zealand are dropped. Our results show, then, that the
operationalizations of benefit durations, and of replacement rates, differ and that those
differences matter.
In our view, all three operationalizations of benefit duration are at once defensible and
debatable. B&Ws has the virtue of simplicity. However, in using the duration of the program
regime (to a maximum of 4 years), whatever the character of that regime, it presents Australia
and New Zealand as generous in this program component even though their transfers are means-
tested from day one and appear to be relatively low. Scruggs and Allans has the virtue of
marking the transition from non means-tested to means-tested and lower benefits (though,
somewhat inconsistent with this approach, Australia and New Zealand, are given a maximum
duration score). But the fall in income associated with the shift to the means-tested phase varies
considerably across countries (as we will see shortly). Nickell explicitly incorporates the relative
falls in transfers over a five year period. There must, however, be substantial arbitrariness in the
assignment of weights for different years: for someone determined to exploit the system to the
maximum, benefits in year 4 may be as important as those of year 3.
We can illustrate some difficulties by describing aspects of some of the systems for which
detailed information is available. In Australia and New Zealand, as we observed above, job-
losers go straight to the means-tested welfare system. Consequently, a job-loser may receive
nothing if his or her spouses employment generates a high enough wage, or if the household has
significant savings. In this case the benefit duration following job loss may be zero! Or it may
become infinite after the households assets have become sufficiently depleted that it qualifies for

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a benefit.
Sweden is always assigned to the generous end of the spectrum. It adopted a system that
provided an 80% replacement rate for the first 100 days to a maximum set by the average
industrial wage, then 75% for the balance of the year, after which the job-loser had to switch to
the relatively ungenerous welfare system.
16
The Netherlands has been providing a 70%
replacement rate, again up to a maximum set by the average industrial wage. The duration of
benefits at that level varies depending on the previous employment duration. Four years got you
six months benefits. Forty years got you five years.
17
Germany has provided a fairly generous
replacement rate - by the early part of this decade 60% for those without children and 67% for
those with children, but the duration of benefits was established at half the duration of the
employment spell prior to the episode of unemployment, with maximums related to age. Those
less than 45 may have qualified for benefits for a maximum of 12 months; those over 57 for up to
32 months of benefits (Adema, Gray, and Kahl, 2003). Means tested unemployment assistance at
a replacement rate of between 53% and 57% kicked in when unemployment insurance expired.
Belgium appears to have been unique in providing benefits for an unlimited duration, for some
periods. This was, however, a less generous scheme than it might first appear because the
replacement rate fell from 60%-55% to 44%-35% as unemployment continued (Pellizzari, 2006).
Nor have unlimited benefits been available to all. Those with spouses with high enough earnings
may lose their entitlement, albeit only after two to eight years of benefits (Cockx and Ries, 2004).
The duration of benefits for different job-losers has also varied in Canada and the US. In
Canada in the early1990s the duration of benefits varied between 14 and 50 weeks, depending on
the number of weeks of work and the regional unemployment rate (Canada, 1994: 8). Region-

-17-
specific qualifying periods were established in 1971 and, while the qualifying conditions for any
given duration of benefits has varied, the essential elements of the system persist (Campeau,
2001). In the U.S. the unemployment insurance program varies by state, which renders
problematic any overall measure of system generosity. In 1995 the maximum duration of benefits
in almost all states and the District of Columbia was 26 weeks (30 in Massachusetts and
Washington). But minimum durations of benefits varied from 4 to 26 weeks with the actual
duration of benefits dependent on either the number of weeks worked or on the amount of
earnings in a designated period. A further complexity is that benefits have been episodically
extended by both the federal and state governments during periods of high unemployment
(Woodbury, 1997: 250-263)
18
- most recently in 2001.
What do these country program examples say about the adequacy of the indices
constructed and used in the quantitative work? First, it is important to distinguish between
unemployment assistance and unemployment insurance schemes (Vroom and Brusentsev, 2005:
48-49). The former - of which Australia and New Zealand are the relevant examples for our
purposes - means-test benefits. In this context a job-loser with a highly paid spouse may receive
nothing rather than indefinite payments. Note, furthermore, that in countries with high or
relatively high replacement rates that phase into less generous unemployment assistance transfers
there has been a tendency for the proportion of benefit recipients supported out of unemployment
assistance to rise: between 1970 and 2000 from 12% to 41% in Austria, from 15% to 46% in
Germany, and from 21% to 49% in the Netherlands (Vroman and Brusentsev, 2005: 73).
19

Second, benefits may initially be high but fall substantially. This is clearly shown in
Table 5, which contains OECD-reported replacement rates for year 1 of the unemployment spell

-18-
TABL E 5
OECD SHORT AND LONG TERM NET REPLACEMENT RATES CONTRASTED, 2001

100% Average Production Worker Wage - Short 100% Average Production Worker Wage - Long
No Children Two children No Children Two children
Single
One-
earner
couple
Two-
earner
couple Single
One-
earner
couple
Two-
earner
couple Average Single
One-
earner
couple
Two-
earner
couple Single
One-
earner
couple
Two-
earner
couple Average
Germany 61 54 85 82 78 96 76 60 63 71 72 69 77 69
Denmark 60 67 77 76 77 78 73 51 76 55 74 79 60 66
Finland 61 69 75 82 81 80 75 51 68 51 63 85 61 63
Belgium 63 55 82 63 58 84 68 47 55 76 63 58 78 63
Austria 55 57 76 72 73 81 69 51 60 47 68 76 67 62
Netherlands 71 73 83 76 77 83 77 58 69 47 63 72 51 60
Sweden 78 78 87 89 82 88 84 52 68 41 56 79 49 58
Switzerland 71 71 82 82 82 88 79 52 64 43 67 73 46 58
Ireland 29 44 59 54 54 68 51 50 64 46 59 72 53 57
UK 45 45 53 46 46 60 49 45 56 42 62 71 58 56
J apan 63 62 80 74 62 81 70 34 48 42 74 71 52 54
France 71 67 82 78 78 83 77 42 52 43 62 68 53 53
New Zealand 38 54 46 62 67 52 53 38 54 46 62 67 52 53
Norway 66 67 80 85 74 83 76 43 50 44 63 69 49 53
Australia 34 30 44 56 69 56 48 34 30 44 56 69 56 48
Canada 63 65 78 75 76 85 74 23 38 45 56 60 59 47
USA 58 60 75 56 55 78 64 7 12 43 36 42 48 31
Italy 52 56 71 60 62 76 63 0 0 45 0 0 53 16
Average 58 60 73 70 70 78 68 41 52 48 59 66 57 54
Source: OECD (20 04)




-19-
and for year 5, for those earning the average industrial wage before job-loss and for different
family types. Only Australia and New Zealand show no fall at all! The Scandinavian countries
less generous treatment of the long-term unemployed is evident. In contrast, in the UK and
Ireland, for some categories of the population benefits rise with the duration of unemployment.
As we saw in Table 1, using Nickells index Swedens benefit duration meanness is exceeded
only by that of Japan. There are two reasons for this, related to the character of the index. The
index, it will be recalled, is constructed out of replacement rates - those in years 2 to 5 of
unemployment expressed as a (weighted) proportion of the year 1 rate. One reason for Swedens
relatively low score is, then, that Swedens year 1 replacement rate is high so that a rate in years
2 to 5 similar to other countries produces a particularly large fall for the country. The other is that
when the period covered by unemployment insurance ends the payments do fall by a lot.
Third, and perhaps most generally relevant, in many countries benefit duration varies
depending on the job-losers employment record. Among the cases reviewed above, this was the
case in the Netherlands, Germany, Canada and the U.S. Nickell and B&W substantially ignore
this issue. Scruggs and Allan deal with it more responsibly by specifying the category covered: a
40 year old with 20 years of employment.
Responsible or not, Scruggs and Allans index remains problematic because, like
Nickells and B&Ws, it assumes a single unemployment benefit experience within countries,
whereas, in fact, benefit experiences are likely to vary across categories of job-loser. The
experiences will be different for job losers with high earning spouses in Australia and New
Zealand, for those who remain unemployed for several years in Sweden, and for those with
different ages or durations of pre job-loss employment in other countries.

-20-
A final problem is that these analyses fail to recognize that benefits are to some degree
substitutable. Cai and Gregory (2005) show substantial inter-program transfers in Australia,
particularly from unemployment benefits to disability benefits, but also transfers from other
programs into unemployment benefits. Pellizzari (2005) provides evidence that, where
unemployment benefits are cut after long durations out of work the effect on benefit recipients
incomes is often reduced because payments out of other welfare programs increase.
Other system components
Providing that additional indicators significantly discriminate levels of system generosity,
it is better to take into account more rather than less system components. Three other components
appear in the literature reviewed above: qualifying periods, waiting periods (the period between
job-loss and the start of benefits), and access rules. We argue that the first and third of these
sharply discriminate but that waiting periods barely discriminate at all.
Qualifying periods clearly matter. A high replacement rate and long benefit duration
mean much less where it is difficult to qualify for a benefit in the first place. Only Scruggs and
Allan (2006a, 2006b) include an indicator of qualifying period. But the use of a single indicator
is as problematic for qualifying periods as it is for replacement rates and benefit durations. In
some systems how long it takes someone to qualify depends on who they are. Consider the
situation at the beginning of the 1990s (Storey and Neisner, 1995). In Canada, as we saw above,
qualification depended on the regional unemployment rate - and could be as low as three months.
In Germany half a years employment over three years qualified seasonal workers for benefits;
for other workers it took a full years employment. In Italy, 52 weeks work in the previous 2
years qualified a person for basic benefits but special benefits required 13 weeks continuous

-21-
employment within that period. Qualifying periods in the U.S. varied substantially by state. The
formulas generated (and continue to generate) widely disparate requirements to qualify for the
maximum benefit for the maximum duration - from a few weeks in Hawaii to about a year in
Indiana (Woodbury, 1997: 213-220). In Austria the minimum qualifying period is 52 weeks of
insured employment in the previous 2 years, except for those under 25 for whom the qualifying
period is 26 weeks of employment within the previous 12 months.
20
These are illustrative cases.
The general point is that a single number will misrepresent most national qualifying periods.
Scruggs and Allan (2006a, 2006b) also treat the waiting period as an indicator or
generosity. These tend to vary less than other indicators, or not to vary at all, which is unhelpful.
In their reexamination of Esping-Andersens (1990) decommodification index they included
1980 waiting periods. In only three countries did they exceed a week (Canada and Ireland, 14
days; the UK 12 days). By the beginning of the current decade only Canada had a two week
waiting period - the next longest was Frances 8 days (OECD, 2004: 21-24). Most waiting
periods fall within a zero to seven day range.
But, in any case, does the waiting period matter? There must be some job-losers whose
situation is so financially precarious that they cannot manage a one week interruption in the flow
of income. We tend to think, however, that there will be few of them. We have found no
evidence suggesting that the waiting period makes much difference to most job losers. Fragments
of evidence suggest, in fact, that it makes little difference. In a review of unemployment and
income security Standing (2000: 18) raised the possibility that the fact that the waiting period
might require two visits to an employment office was likely to deter a few timid people from the
process - which might be unfortunate for those people, but does not sound like a high incidence

-22-
problem. In a study of the effects of unemployment compensation on hours of work, of the five
properties examined (coverage, the replacement rate, minimum and maximum benefits as well as
the waiting period) only the waiting period had no effect (Eisenhauer, 1999). The inclusion of the
waiting period in an index of unemployment compensation generosity is likely to muddy the
waters rather than help.
Finally, there are rules of access. This is tapped by Nickell, Nunziata and Ochels (2005)
index of strictness of benefit conditions. None of the other comparative work we have reviewed
considers access rules. We would argue that this is a major weakness of attempts to assess benefit
generosity. We would also argue that the Danish Ministry of Finance index used by Nickell,
Nunziata, and Ochel should be considered problematic.
Grubb (2000; Atkinson and Micklewright, 1991: 1718 made a similar point) provides the
best analysis of them of which we are aware. First, they certainly matter. The enforcement of
eligibility criteria may have a larger impact on behaviour than variations in replacement rates do,
because the income implications for the individual are larger: when a person is found to be
ineligible for unemployment benefits, his replacement rate falls to zero (2000: 149). There are
two sorts of relevant eligibility criteria, those that determine initial access to benefits and those
that determine whether receipt is prematurely terminated. Initial access is usually limited when
someone quits a job or is fired for cause. It might also be limited with more stringent qualifying
requirements for the young. Continued benefit receipt is usually contingent on willingness to take
a job that is defined as suitableor enrol in a training program, or on evidence of job-search
activity.
Grubbs review of policies suggests that countries that appear generous using information

-23-
on replacement rates and benefit durations sometimes have swingeing sanctions for eligibility
violations. Among otherwise generous countries the period of exclusion from benefits caused by
a voluntary quit is 8-52 weeks in Belgium, 4 months in France, 12 weeks in Germany and 8
weeks in Norway in contrast to 4-5 weeks in Australia and 1-26 weeks in the U.K., both
countries, according to the commonly used indicators, ungenerous. Similarly, two refusals of jobs
or training programs leads to penalties of complete exclusion from benefits in Belgium,
Denmark, Germany, and France (sometimes) but to a benefit penalty of only 6 weeks in Australia
and, in the UK, 1 to 26 weeks for refusal of a job and 4 weeks for refusal of a training program.
However, as Grubb makes clear, legislated penalties can be misleading indicators of
benefit generosity. There is some evidence that swingeing sanctions are often accompanied by
inconsistent application of the rules. In the mid 1990s Canada imposed more substantial penalties
on those who became unemployed by quitting. But there was no immediate effect on the number
of people qualifying for benefits: what seems to have happened is that employers were persuaded
to reclassify quits as lay-offs (Kuhn, 1995: 26). Denmark, on the other hand, imposes a rather
mild one week loss of benefits for a first refusal of a job or labour market program but moves to
complete exclusion after a second refusal. Grubb (p.155) suggests that a mild initial sanction is
chosen precisely in order to increase the likelihood that the sanction will be applied - which sets
the stage for the swingeing sanction imposed after two refusals.
The fact that officials may be unwilling to impose sanctions should not be construed to
mean that they never do so. Almost all the countries for which Grubb provides evidence
disqualify significant proportions of benefit recipients for one reason or another (p.158). For the
period reviewed by him, of the total stock of benefit recipients Belgium disqualified 4.2%,

-24-
Denmark 4.3%, Finland 10.19%, Norway 10.84%, the U.K. 10.3%, and Switzerland 38.49%.
(The outlier is the U.S. It disqualified 56.99%!) However, the interpretation of even these
numbers is not straightforward. People may be willing to incur a sanction where the loss from
doing so is small. Grubb suggests that this is the case for Finland as compared to Denmark. The
penalty for a second job or program placement refusal is exclusion from benefits in Denmark as
opposed to (normally) 2 months in Finland. Consequently, those unemployed in Denmark have a
stronger interest in evading sanctions.
Grubb reviews research (pp.163-169) that suggests that, where enforced, stricter
application of eligibility criteria reduces the numbers of benefit recipients. The point to be drawn
from all this is that the relative strictness of eligibility requirements is difficult to establish.
Nonetheless, there are very good reasons to think that strictness ought to matter in judgements of
program generosity. Most importantly of all, some countries with generous replacement rates or
benefit durations seem to attempt to combine that generosity with administrative strictness.
Grubb claims that this has very clearly been the case for Norway (p.176, note 30).
21

EFFECTIVE PROGRAM GENEROSITY
Table 6 contains information on unemployment durations across the standard OECD
sample. The countries are ordered by the percentage of unemployment spells lasting less than 3
months, from largest to smallest (the third column of data). For purposes of comparison with
previous tables the data are again for 1995. In the last column we have added the unemployment
rate. The table shows, first, that countries have widely varying unemployment durations. More
than two-thirds of all episodes of unemployment in the USA lasted less than 13 weeks. More
than a third were less than a month. Only 7.3% of episodes of unemployment in Italy were less

-25-
TABLE 6
UNEMPLOYMENT DURATIONS IN MONTHS IN SELECTED OECD COUNTRIES IN 1995*

Males and Females Males Females

Less
than 1
1 to less
than 3
Less
than 3
More
than 12
Unemploy-
ment rate
More
than 12
More
than 12
USA 36.5 31.6 68.1 9.7 5.6 11.0 8.1
Canada 18.2 33.9 52.1 16.8 9.5 18.3 14.8
J apan 18.1 29.1 47.2 18.1 3.1 23.5 10.0
Norway 21.4 22.5 43.9 24.2 5.0 28.6 17.3
New Zealand 21.1 21.2 42.3 25.5 6.3 29.7 20.1
Austria 11.3 26.9 38.2 29.1 3.9 27.9 30.4
Sweden 17.0 19.8 36.7 27.8 9.2 31.4 22.9
Australia 14.7 20.3 35.0 30.8 8.6 34.2 25.6
Denmark 23.4 11.3 34.7 27.9 7.2 31.9 24.9
Switzerland 9.2 18.5 27.7 33.6 3.5 31.1 36.0
Finland 13.8 10.2 24.0 37.6 16.2 41.4 33.3
UK 10.6 12.7 23.3 43.6 8.8 49.6 32.3
Germany 7.6 10.6 18.2 48.7 8.2 45.9 51.3
France 3.7 13.9 17.6 42.5 11.7 41.5 43.3
Belgium 9.7 3.9 13.6 62.4 9.9 61.4 63.2
Ireland 5.0 6.3 11.3 61.6 12.3 66.8 52.9
Netherlands 6.2 4.5 10.6 46.8 6.9 51.6 42.0
Italy 3.9 3.4 7.3 63.6 11.9 62.7 64.4
*Source: http://puck.sourceoecd.org/vl=36247268/cl=18/nw=1/rpsv/~3962/v123n1/s5/p1








-26-
than 13 weeks and not quite 4% were less than a month. Correspondingly, less than 10% of
episodes of unemployment in the USA exceeded a year while in Italy more than 63% did so.
Second, several of the countries in Table 1 that are reported to have low or relatively low
replacement rates have short unemployment durations - for example, the USA, Canada, and
Japan. Third, countries may combine quite high unemployment rates with short durations (e.g.,
Canada) or low unemployment rates with long durations (e.g., the Netherlands). Fourth, in Japan,
Norway, the UK, and Ireland the differences in unemployment durations between males and
females are large (crudely defining large as greater than ten percentage points).
In discussions of program generosity it is common to consider the unemployment rate
(e.g., Vroman and Brusentsev, 2005: 59-68). Unemployment rates are indicators of the
magnitude of the need that has to be addressed. It is our impression that the implications of
unemployment durations have been largely ignored. Consider the following hypothetical case.
Suppose someone was employed full-year in 1994 then in 1995 was unemployed for a quarter of
the year, and employed for the balance of it. Suppose, further, that the person was in a country
whose unemployment compensation system provided a (low) 50% replacement rate and was re-
employed at the same wage as before the episode of unemployment. That persons 1995 income
would have been 0.75 of the previous years income (three quarters of a years earnings at the
same wage rate) plus 0.50 (the replacement rate) of the remaining 0.25 of the years earnings.
This yields an income in the year of unemployment that was 87.5% that of the previous full year
of employment. Shorter unemployment episodes would further increase income in the year of
unemployment as a percentage of income in the previous full year of employment. Conversely,
longer episodes would reduce it. Transfers that do not appear in the OECD replacement rate will

-27-
further increase income in the year of unemployment as a percentage of previous years income.
22

This means that, despite an unemployment compensation system designed to be less
generous than that of other relevant countries, most job losers in the United States experienced
(and continue to experience) income losses smaller than those in, say, the Netherlands because
two-thirds of them were back at work and earning again within 12 weeks while more than half of
the Dutch were unemployed for more than a year.
23
Furthermore, in 1995 Canada, Sweden and Australia combined relatively high rates of
unemployment with short durations and the Netherlands a low unemployment rate with long
durations. The unemployment rate, then, may be a misleading indicator of the sort of need to be
met by a replacement rate. Proportionately fewer people are unemployed in the Netherlands than
in Canada. But the substantial proportion of them who are out-of-work for more than a year
clearly depend more heavily on government transfers than the even larger proportion who in
Canada are only briefly out-of-work. More generally, in analysing the causes and consequences
of program generosity an exclusive focus on the standard range of program design characteristics
is likely to mislead.
24

Remember that the general issue we are considering is the reliability of estimates of the
effects of unemployment compensation design on work incentives and income protection. In
terms of incentive effects the question is, do those considering the possibility of, or experiencing,
unemployment, confine the time horizon over which they evaluate their position to their earnings
in the week prior to job-loss and the period during which they are subject to unemployment? The
replacement rate analysis in cross-national research assumes that they do. We propose that they
often do not.

-28-
Canadas unemployment compensation system illustrates this well. Its distinguishing
feature is that the qualifying period for benefits and their duration are tied to the regional
unemployment rate. In a most interesting comparison of contiguous and economically similar
New Brunswick and Maine, Kuhn and Riddell (2006) show that before the development of
regional benefits in Canada there was about the same incidence of part-year work in the two
jurisdictions but after the program was established the incidence fell in Maine and rose
substantially in New Brunswick. By 1990 the incidence of part-year work among men was 18
percentage points higher in New Brunswick than Maine, and 9 percentage points higher among
women. It is fairly clear that seasonal work has become a stable and foreseeable form of labour
force participation, and that seasonal work implies anticipated episodes of unemployment. Many
potential labour force participants in New Brunswick appear to take into account something like
total likely income over a year - combining earnings and transfers - rather than confine their
attention to total likely transfers alone.
The indicators of unemployment program generosity used in the relevant literature are
derived from program rules. What we have shown here is that what rules mean varies with
unemployment durations, which in turn vary considerably across countries. Shorter durations
reduce the importance of the replacement rates that are designed into programs. Some countries
whose program designs suggest lack of generosity may be effectively more generous because so
much of their unemployment is of short duration. Finally, while higher unemployment is
associated with longer durations in aggregate, within the small sample of countries used in the
relevant comparative research there are several marked divergencies from this pattern. All of this
matters because it implies income loss experiences as a result of unemployment that are likely to

-29-
diverge from those suggested by the standard indicators of generosity.
In the next section we return to the implications of the different unemployment durations
by sex revealed in Table 6.
CONCLUSION
Unemployment compensation generosity is a standard component of cross-national
analyses of welfare states. Those analyses have generated substantially divergent conclusions - on
whether or not generous benefits reduce labour market efficiency, on their effects on absolute
poverty, and on whether globalization causes welfare state retrenchment. The relevant cross-
national analyses rely mainly on two indicators of generosity - replacement rates and benefit
durations, expanded sometimes to include waiting periods and qualifying periods and, in one
paper, access rules. In all the relevant studies the research uses a single, summary, indicator of
each system property derived from the OECD.
We have shown why the divergence in results across studies need not be surprising.
Concepts that seem intuitively easy to grasp and that are derived from series published by the
same international organization turn out, on careful review, to be operationalized in substantially
different ways. This is well illustrated in Tables 1 and 2, that show just how divergent are the
estimates of replacement rate and benefit duration.
But the more fundamental point we make is that the measures are not just divergent; they
are also inadequate for the purpose of testing the relevant hypotheses. Most fundamentally, single
indicators grossly oversimplify complex systems. Table 3 and the left side of Table 5 provide
good evidence of this for the case of replacement rates. Within countries, generosity often varies
substantially depending on the income and family characteristics of the job-loser. Across

-30-
countries relative generosity fairly substantially shifts, depending on the income/family category
being compared. The same complexity applies to each of the other system properties we
discussed - benefit duration, qualifying period, rules of access combined with the application of
those rules, and even benefit waiting periods (though we remain unconvinced that they are an
important indicator of system generosity). That complexity cannot be easily summarized in a
table (or, perhaps, cannot be summarized in a table, period) because information on these system
properties is inconsistently available in a suitable form across countries. We think we have given
enough examples of system complexity across program components to make this case.
The relevant cross-national analyses are also inadequate because they neglect to
incorporate important system components. One of these is the range of transfers received by
some job-losers. Evidence of the complexity of this issue is provided in a recent OECD (2004:
137-138) publication. Inclusions and exclusions are in a continual state of renegotiation between
the OECD and government statistics agencies. Improved understanding of the administration of
housing benefits, the tax treatment of those with children, and related issues led to the
modification of the rates of 9 of the 18 countries in Table 3 between the 1998/1999 versions of
the source publication and the version used in this analysis (OECD, 2004: 137-138).
There are also the less regularly included system components of which we emphasize
two: the qualifying period for benefits and rules on admissibility to benefits - the latter at both the
point of job loss and when unemployed. As Grubb (2000) emphasises, disqualification
immediately reduces a replacement rate to zero. His evidence suggests fairly substantial
differences across countries in the rigour of the rules themselves and in rule application. It is true
that his discussion also suggests how difficult it is to draw summary conclusions about this

-31-
aspect of system generosity. But that can hardly be a reason for ignoring the issue.
We have also argued that the degree of generosity of an unemployment compensation
system should be related to the magnitude of the problem addressed by it.
25
We have emphasised
the differences across countries in unemployment duration. A group of countries - mainly Anglo-
American democracies, but also Japan and Norway - has low unemployment durations. In those
countries, whether or not the benefit duration extends over several years is irrelevant to most job-
losers. In 1995 less than a quarter - in the cases of the US and Canada substantially less than a
quarter - of beneficiaries experienced unemployment durations that exceeded a year. In the latter
two countries most episodes lasted less than three months. An unemployment duration of three
months or less will yield an income during a year of unemployment that is not markedly less than
in the year that preceded the episode of unemployment, even if the replacement rate is modest. It
seems likely to us that this will modify the motivations of someone considering the sort of
leisure/labour tradeoff that underlies standard economic concerns about unemployment
compensation generosity as well as the likely effect on the incidence of poverty.
The question that all of this raises is: To what degree do the problems in indicators we
discuss above have implications for the capacity to test hypotheses of the sort listed at the
beginning of this article? In publications it is common to come across a phrase something like the
following: there are flaws in the indicators used but they are the best available. B&W, in fact,
said something like this about the replacement rate they used. On the one hand, the use of a
flawed indicator may allow the preliminary exploration of an issue. On the other hand, our
impression is that in the conclusions to articles and in subsequent use of them the weaknesses of
indicators are often forgotten. Worse yet, people sometimes make policy recommendations on

-32-
the basis of articles that have used flawed indicators. Or, pertinent to this body of literature, quite
a lot of analysts fail even to recognize the degree to which indicators are flawed.
Consider the hypotheses that we summarized at the beginning of this paper. For Nickell,
for B&W, and for Kenworthy (though he finally rejects the hypothesis) what is at issue is the
effect of unemployment compensation generosity on the preference for leisure. The hypothesis
suggests that the unemployed in Australia and New Zealand would be deterred from choosing
leisure but those in Denmark, Sweden, the Netherlands, France, or Switzerland should embrace
it. Table 3 suggests that New Zealand and Australian low earners with dependents should be
almost as likely to opt for leisure as their European counterparts, and Canadian job-losers who
are part of a couple should have an equivalent propensity. It is possible that in Denmark, Sweden,
the Netherlands, France, or Switzerland the size of the subcategories of the population to which
the unemployment compensation program is generous is sufficiently large to produce the macro
effects these authors are seeking.
But there is reason to doubt this. There is, rather, evidence that relevant incentive effects
are concentrated within parts of the labour force. Using Danish data from the mid 1990s
Pedersen and Smith (2002) showed that women with smaller differences between their usual
earnings and their income on benefits - that is, women with low earnings - were more likely to
become unemployed, engaged in less intense job search, and had lower acceptable maximum
commuting times than others. Pedersen and Smith saw these as perverse incentive effects and
showed that, in Denmark at least, they were concentrated in specific subgroups of the population.
Furthermore, as Table 6 showed, in several countries there are substantial differences by
gender in the incidence of long duration unemployment. In all four cases where the difference is

-33-
10 percentage points or more the incidence of long duration unemployment was consistently
higher among men. Since men on average earn more than women the fall in income for a
household from male job-loss, then, will be greater than it is for their spouses. The income
reduction from male as opposed to female job-loss is further increased where male
unemployment durations are substantially longer. Consequently, the incentive effects of transfer
programs are likely to be greatest for women, for whom job-loss produces a smaller income
decline than for men and the difference is likely to be largest where differences in unemployment
durations are added to earnings differences by gender. Conversely, male job-loss is likely to have
larger negative effects on household welfare. Differences in unemployment durations by age
would have similar implications.
More generally, benefit system complexity makes it very difficult to make summary
judgments of relative program generosity. In some countries unemployment compensation
generosity varies by category of the population - by age, by family situation, and by duration of
previous employment. Some of these variations imply increased generosity to those most likely
to respond to perverse incentives. Sweden and Denmark, for example, have been distinctively
generous to those who previously had low pay, for whom, according to the standard economic
logic leisure is most attractive because not having employment involves a smaller income
sacrifice. But in important respects the specification of system complexity suggests narrowed
differences across countries. Taking into account taxes, as Scruggs and Allan do, improves the
relative generosity of otherwise mean countries like Australia, New Zealand, Ireland, and the
UK. The relative performance of Australia and New Zealand is further improved if the focus is
on those with low pre job-loss earnings and dependents. Canadas treatment of seasonal workers

-34-
is distinctively (but not uniquely) generous. And Grubbs analysis raises the possibility that some
of the Scandinavian countries - in particular Norway - have relatively stringent eligibility rules
that raise the threshold for getting unemployment insurance in the first place and then impose
fairly substantial performance standards on those receiving it. The existence of these, too,
narrows the difference between the more and less generous countries.
Now, none of this is to suggest that these complexities make Sweden, say, into a country
that is equivalently ungenerous to the USA. Nor do they suggest that nothing can be learned from
careful consideration of information assembled in OECD publications. What they do, however, is
raise questions about attempts to analyze welfare state generosity through the use of limited
numbers of indicators of generosity, in particular when those indicators are incorporated into a
regression or related analysis. (And, we would argue, regression and related analyses tend to
increase the authority of the results produced and the interpretation that rests on them.) Those
analyses assume that a reasonable metric is available of the generousness of each system property
incorporated. The analysis above suggests strongly that this is not a reasonable assumption.
It should be clear that these issues are not only relevant to the construction of accounts of
macroeconomic outcomes at the core of which is the leisure/labour tradeoff. They also have
implications for comparisons of welfare state generosity and its causes. For example, remember
that Scruggs and Allan (2006a) found that unemployment compensation program generosity did
not reduce the relative incidence of absolute poverty. This result may rest on the fact that even
their (commendably broad) measures of generosity fail to take into account the fact that their
average lack of generosity conceals the fact that Australia and New Zealand treat job-losers with
children and low pre job-loss earnings relatively well, that Swedish benefits fall to a very low

-35-
replacement rate after about a year of high replacement rates, that the Norwegian and Danish
systems include fairly draconian sanctions for failure to conform to activation programs, and
that Canada props up the earnings of seasonal workers to a possibly extravagant degree.
Evidently these problems apply to attempts to measure the effects of globalization and
party on system generosity. There is a further major difficulty with these analyses. The averages
across household types are not adjusted for the relative sizes of different clienteles. They are
unweighted. This must surely pose a problem for comparisons over time (Iversen, 2001; Korpi
and Palme, 2003). For example, in most societies the proportion of lone parents has increased
(Daly, 2005). But we know from Table 3 that countries with less generous systems like Australia,
New Zealand, and Japan tend to treat lone parents better than those with no children. Again, that
does not make them as generous as Sweden but the difference is narrowed as compared to that of
the childless. The proportion of lone parents varies quite markedly across societies (Chambaz,
2001). This is a further problem for comparisons of unweighted averages. There have been shifts
in the earnings distribution of some societies so that the relative proportions at two-thirds of the
average industrial wage and fifty percent above it have no doubt changed too (Gottschalk and
Smeeding, 1998). The U.S. is more unequal than other societies so its shares of the population
with low earnings are higher than is the case in most other countries (Smeeding, 2005).
All this may be thought of as overly negative. We have not provided a better measure of
system generosity. Rather, we have demonstrated the inadequacy of those used by others.
However, there is a substantial body of literature, some of it informing policy, that rests on
indicators that might (generously) be regarded as unreliable. At some point, it seems to us, the
weakness of that literature needs to be recognized. And there are data sets that allow better

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exploration of the effects of job-loss on income. Panel data sets that are available for a number of
countries include detailed information on labour market experience, income, and income sources,
over time - for example, the Panel Survey of Income Dynamics in the U.S., the Survey of Labour
Income Dynamics in Canada, and the Household, Income, and Labour Dynamics in Australia
survey. We are currently exploring the issue of income after job loss using two of these surveys.
These surveys do not permit cross-national analyses of system generosity across 18 or so rich
OECD countries. But we suggest that there is a real possibility that the cost to using those data
sets greatly exceeds any potential benefit from doing so.















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ENDNOTES

1.A similar line of argument can be found in Elmeskov, Martin, and Scarpetta (1998). In their
case the dependent variable is the OECD indicator of structural unemployment and their
explanatory variables include both institutions (including the replacement rate) and interactions
between institutions.

2.This analysis is extended in Bertola, Blau, and Kahn (2001) to explain differences in the labour
market experience of different groups - in particular, the young and the old as compared to
prime-age males.

3.This is part of an examination and critique of Esping-Andersens (1990, 1999) analysis of
decommodification. For another useful critique see van Voorhis (2002).

4.In fact, in his paper Iversen provides no discussion of the mechanisms that might link
globalization to welfare state retrenchment. He simply presents the hypothesis and attempts to
test it. Mechanisms are, however, discussed in the paper in the same collection that precedes
Iversens (Schwartz, 2001). We draw the discussion of the mechanism from that paper.

5.Allan and Scruggs (2004: 498) note the limited value of the usual OECD series. The principal
conclusion they draw from this is the need to use post-tax replacement rates.

6.Bassanini and Duval (2006) conclude that both institutions and institution-shock interactions
explain inter-country differences in unemployment rates.

7.Kenworthy constructs charts describing the relationship between changes in employment
versus replacement rates and benefit durations for five countries (the US, Canada, the UK,
Germany, and Sweden). These suggest a negative relation between employment growth and
unemployment compensation generosity. But these charts are followed by a discussion of
changes over time in the five countries that leads Kenworthy to conclude that there is reason to
question the importance of welfare state generosity in causing employment declines (2004:
112). Strictly speaking, then, Kenworthys analysis using aggregate data supports his initial
hypothesis, but he uses other evidence to reject it.

8.Allard and Lindert (2004b:106) also broaden the range of unemployment compensation
indicators used. They combine indicators of system rules (the replacement rate, the duration of
benefits, the coverage rate) and outcomes of the rules (the take-up rate, the elasticity of labour
supply). We think it worth separating program rules and outcomes of the rules and in this paper
focus on the former.

9.In a splendid article, Atkinson and Micklewright (1991) made arguments that partially overlap
those made here. Evidently, there paper has not succeeded in substantially modifying the
methodological practices of subsequent research.


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10.The rates used by Kenworthy can be read off a graph he presents (2004: 109), but imprecisely.
Other authors simply cite the OECD. Korpi and Palme (2003: 443) are a case apart. They have
been constructing a cross-national data set for 20 years or so which they have not made available,
justifying their decision by quoting a policy of the International Sociological Association to the
effect that a data set need not be made public until the researchers who have assembled them
have specified the sources of their data and the methods by which they were constructed. As
Castles (2004: 49) underlines, this has not prevented a fairly substantial flow of publications
using the data.

11.The three exceptions are the Netherlands, France and Italy. The Netherlands is unproblematic.
The maximum and the average coincide in that case. Italy and France, however, are puzzles - we
have no idea why B&Ws procedure generated a smaller replacement rate in those cases.

12.B&W (2000: C24) address this issue by rerunning their analysis using different measures.
They do not regard the results from the alternative measures as inconsistent with those from their
preferred measure. But the alternate measures are included in an equation that is differently
specified - two measures of replacement rates are simultaneously included in it rather than one and
the coefficients estimated for those measures are about half those of the authors preferred
measure.

13.For those influenced by Esping-Andersens (1990) classic discussion of the welfare state this
result poses problems. In his analysis, social democratic entitlements are based on citizenship
rather than need or contributions. But with the more informative series in Table 3 we can see
from the difference between low and high pre job-loss earners that Denmark and Sweden
differentiate benefits according to need - to a greater extent than the corporatist French or
Germans or even, for that matter, than the liberal Canadians.

14.Scruggs and Allan (2006b) translated these durations by year or fraction of year into a 3 point
scale: 1 if the duration was more than one standard deviation below the mean; 2 if the duration
fell between plus and minus a standard deviation from the mean; and 3 if the duration exceeded 1
standard deviation above the mean. Note that three countries have no limit rather than a score in
all or some years.

15.Compare this with the relevant paragraph in the middle of p.67 of his paper. It gives no
indication that this is the case.

16.OECD Country Chapter: http://www.oecd.org/dataoecd/51/63/36220277.pdf

17.OECD Country Chapter: http://www.oecd.org/dataoecd/51/56/36220151.pdf

18.Some more recent information on this is contained in:
http://workforcesecurity.doleta.gov/unemploy/extenben.asp



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19. This is partly produced by a general tendency on the part of the more generous countries to
become less generous. In the conference presentation that preceded her article Pellizzari
summarized the relevant institutional history: durations were reduced in Denmark in 1994 and
1996, in Finland in 1993 and 1995, in France in 1993, in Germany in 1995, in the Netherlands in
1987, and in Spain in 1992 (http://www.npc.umich.edu/news/events/NPCEUconf/pellizzari.pdf).
Kvist (1999, 2002) documents substantial reductions in the generosity of the unemployment
compensation systems in Denmark, Sweden, Finland, and Norway in the 1990s. Clasen, Kvist,
and van Oorschot (2001) document increasingly stringent application of eligibility criteria in the
same group of Nordic countries and in Germany and the Netherlands over the same period.

20.http://www.oecd.org/dataoecd/52/13/33742775.pdf

21.Grubb (2000: 175, note 25) also, in our view appropriately, takes a swipe at the studies that
find program generosity effects using the standard criteria. Thus: Reported regressions which
explain unemployment across countries using multiple explanatory variables are usually the tip
of a large iceberg of possible alternative specifications which were not followed up or reported
by the researchers. Often, the equation actually reported has an implausibly tight statistical fit,
given the size of known errors in input data and short- and medium-term fluctuations in
unemployment rates. The real significance of such findings is not clear. We suspect that he
means that these findings have little real significance.

22.For example, if a family received child support payments both before and during an episode of
unemployment the proportionate loss of income caused by the job loss would be reduced
(probably slightly). If the fall in income caused by the job loss triggers a transfer additional to
unemployment compensation it will increase the replacement rate by a lot. A difference between
Scruggs and Allan, on the one hand, and Nickell, and B&W on the other is that the former
attempt to incorporate social transfers in addition to the base unemployment compensation.

23.The interpretation of the results for the U.S. are not quite as straightforward as this because
we have ignored the out of the labour force category. An unemployment spell may be terminated
either by employment or by withdrawal from the labour force on the part of the unemployed
person. We know that in the relevant period, as compared to Canada, job-losers in the U.S. were
more likely to withdraw from the labour force (Card and Riddell, 1993; Riddell, 2005). We doubt
that adjusting for this would extend U.S. unemployment durations to anything like those of the
longer duration countries in Table 6. It is worth underlining that despite a propensity on the part
of job-losers to remain in the labour force Canada has the second highest proportion of short
duration unemployment spells.

24.In the arithmetic example above that generated an income during the year of unemployment
that is 87.5% of the income from a previous year of full-time, full-year employment we assumed
that the job-loser is rehired at the previous years wage. This assumption may be unreasonable.
We know that job-loss is often followed by pay at a rate lower than the pre job-loss rate
(Hamermesh, 1987; Ruhm, 1991; Stevens, 1997; Eliason and Storrie, 2006). Still, if in the year


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of unemployment the employee spent the first few months prior to job-loss with the same
employer as in the year prior to unemployment it is likely that his or her pay would have
increased a bit, pushing up the year of unemployment income as a percentage of income in the
pre unemployment year. In any case, as we show below, while there are examples of job loss that
produce large falls in earnings in subsequent unemployment, that is by no means always the case.

25. Voorhis (2002: 8-9) makes the point that an aspect of the transfer system that has been
systematically ignored is the extent of private provision of benefits. Thus: An accurate
accounting of the extent to which social welfare provisions promote the decommodification of
labour must include the cash value of voluntary private benefits, such as ...unemployment
compensation.... Although these voluntary provisions are not publicly mandated, they are
publicly subsidized to varying degrees through tax concessions".

































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