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Swedish Unemployment Insurance Reforms

Swedish Unemployment Insurance Reforms. Bertil Holmlund Department of Economics Uppsala University University of Aarhus September 17, 2008. Outline. UI in Sweden UI and part-time unemployment UI and active labor market policies Financing UI UI and tax reforms

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Swedish Unemployment Insurance Reforms

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  1. Swedish Unemployment Insurance Reforms Bertil Holmlund Department of Economics Uppsala University University of Aarhus September 17, 2008

  2. Outline • UI in Sweden • UI and part-time unemployment • UI and active labor market policies • Financing UI • UI and tax reforms • UI and sickness insurance • Supplementary compensation schemes

  3. UI in Sweden • Universal basic insurance (flat benefit) • Voluntary income-related insurance for members of UI funds • Almost all UI funds are affiliated with unions • Financed by membership fees and gov’t subsidies • Benefits proportional to previous income up to a ceiling • Eligibility requires previous work • Benefits are taxable income • Supplementary compensation through collective agreements

  4. Maximum duration of benefits: 300 days • 5 days a week, 60 weeks • But the rules have been soft: • Additional period of 300 days possible • ALMPs available for workers at risk of benefit exhaustion • ALMPs have sometimes been accepted as activity qualifying for future benefits • Work requirement for eligibility: • 4-6 months work during the past 12-month period • Infrequent changes of the statutory replacement rates but frequent changes of the benefit cap

  5. The evolution of nominal benefits (SEK/Day)blue: maximum; red: average

  6. The evolution of benefits relative to wages (index)

  7. UI reforms during the 1990s • 1993 • Cut in replacement rates (RR) from 90 to 80 percent • Cut in the benefit cap (constant until 1997) • 1996 • Cut in RR from 80 to 75 percent • 1997 • Increase in RR from 75 to 80 percent

  8. UI reforms 2001-2002 • 2001 • Search requirements • Sanctions: milder but more frequent • Eligibility: ALMP participation does not qualify • 2001 • Benefit hikes • Two-tiered cap structure: the benefit cap falls after 20 weeks • 2002 • Further benefit hikes, two-tiered cap structure

  9. Replacement rates by wage percentile, 1992-2002

  10. UI reforms 2007 • Lower benefit caps, caps independent of duration • Three-tiered replacement rate structure: • 80 % during the first 200 days • 70 % during days 201-300 • 65 % from day 301 • Time in ALMP treated as time as unemployed • Increase in the waiting period (from 5 to 7 days) • Stricter qualification rules • Cut in subsidies to the UI funds

  11. UI reforms 2007, cont’d • ALMP for the really long-term unemployed (“jobb och utvecklingsgaranti”) • 65 % replacement rate

  12. Two studies of Swedish UI reforms • The 1996 reform – cut in the statutory replacement rate • Carling, Holmlund and Vejsiu (2001) • The reforms 2001 and 2002 – changes in benefit caps • Bennmarker, Carling and Holmlund (2007)

  13. Benefit cut 1996 (80 to 75 %) Benefit 80 75 % 564 Wage 705 752

  14. Benefit cut 1996 (80 to 75 %) Benefit 80 75 % 564 705 752 Wage Treatment Control

  15. Benefit cut 1996:Increased job finding in the treatment group relative to the control

  16. Benefit cut 1996, cont’d • Boost of job finding, + 10 % • Strongest effect among young people

  17. Reform 2001 Benefit 2001 680 2000 580 A B C 20 0 725 850 Wage Duration (weeks)

  18. Reform 2002 Benefit 2002 730 2001 680 2000 580 A B C D Duration 20 0 725 850 912.50 Wage

  19. 2001-2002 reforms: Estimated effects on the expected duration of unemployment (weeks)

  20. UI and part-time unemployment • Part-time UI is available for part-time unemployed • Accounts for 25 % of total expenditure on UI • Example: • Actual hours: 20 hours/week; desired hours: 40 • Compensation corresponding to 20 hours available • Benefit receipt can last for many years • In the past: 300+300 days of full-time compensation • Evidence of lax monitoring of job search among part-time unemployed

  21. Part-time cont’d • Reform 2008: • Maximum 75 days of compensation • Unemployment corresponding to 50 % of full time would imply maximum 150 days (30 weeks) of compensation

  22. Policy issues, part-time UI • Incentives to use UI as income supplement during voluntary part-time work • Employers and employees may have common interests to exploit the UI system • But part-time UI is analogous to in-work benefits • Incentives for accepting part-time jobs

  23. Policy issues, cont’d • Reducing the maximum benefit period (the 2008 reform) • Regulation: give part-time unemployed workers ”right to full-time work” • Experience rating: Let the employer contribute financially to its use of part-time UI • Part-timers are attached to the firm • Cf. US-style experience rating

  24. UI and ALMP • ALMP has been an important destination for the long-term unemployed • Soft time limits

  25. Transition rates, unemployment to ALMPsSweden in the early 1990s

  26. UI and ALMP, cont’d • But the time limits seem to have real effects: • Job finding increases as the date of benefit expiration is approached • Compare insured and non-insured workers • Or compare Norway and Sweden

  27. Job finding: Sweden early 1990s

  28. Job finding in Sweden and NorwayRøed, Jensen and Thoursie (2008)

  29. UI and ALMP, cont’d • The 2001 reform of the sanctions system • Softer sanctions but more frequently applied • No evaluation so far

  30. Financing UI • Benefits provided by the UI funds have been heavily subsidized by the government (90 %) • No link between unemployment in an industry (occupation) or membership fees • Arguably weak incentives to prevent unemployment (search, wage setting)

  31. Recent reforms of the financing system • 2007: cut in subsidies • Much higher membership fees (with caps) • But still weak relationship between fees and unemployment in the UI fund • 2008: restructuring of the subsidy system • Members finance 33 % of the income-related benefits – but cap on membership fees

  32. Membership in the UI funds 1974-2004

  33. The reforms have reduced UI coverage

  34. And union density has fallen

  35. Financing UI: Policy options • Option 1: Reinstall the old system with higher subsidies and lower membership fees • Option 2: Obligatory UI • But obligatory UI is likely to further reduce union density • Threat to the legitimacy of the Swedish model of co-determination at the workplace where the voice of workers is articulated through unions • Option 3: Obligatory UI but with incentives for workers to be members of a UI fund

  36. Financing UI cont’d • A case for experience rating of firms? • Part-time unemployment – yes • Unemployment in general – no • Already high implicit layoff taxes through employment protection

  37. UI and the tax system • UI benefits are taxable income in Sweden • The after-tax replacement rate has been approximately independent of the tax rate for most unemployed workers • A large segment with proportional taxes • 2007 reform: In-work tax credit through deductions (D) • Income after tax when unemployed: B(1-t) • Income after tax when employed: W-t(W-D) = W(1-t) +tD; (tD is an in-work tax credit)

  38. UI and the tax system • UI benefits are taxable income in Sweden • The after-tax replacement rate has been approximately independent of the tax rate for most unemployed workers • A large segment with proportional taxes • 2007 reform: In-work tax credit through deductions (D) • Income after tax when unemployed: B(1-t) • Income after tax when employed: W-t(W-D) = W(1-t) +tD tD is an in-work tax credit

  39. Compare benefit cuts and in-work tax credits (S) • Income after tax when unemployed: B(1-t) • b=B/W is the replacement rate • Income after tax when employed: • W(1-t)+tD=W(1-t)+S; S is in-work benefit • Standard model absent in-work benefits: • Unemployment depends on the replacement rate, b • Model with in-work tax credits: • Unemployment depends on (b – s); s=S/W(1-t) • Higher in-work tax credits and benefit cuts are approximately equivalent

  40. Swedish tax reform (2007): In-work tax credit The cut in the effective replacement rate has been substantial Should reduce equilibrium unemployment

  41. Effects on labor force participation • Benefit cuts should reduce labor force participation • In-work tax credits should increase labor force participation

  42. UI and sickness insurance (SI) • SI is obligatory, UI voluntary • Compensation levels in UI and SI may differ • Unemployed workers who report sick are entitled to SI benefits • Incentives for benefit arbitrage: • If SI>UI – choose SI rather than UI • UI is time-limited – choose SI so as to prevent expiration of UI

  43. Scope for benefit arbitrage in the late 1990s

  44. Larsson (2006) • Evidence that the higher ceiling in SI induces excess sick reporting in income brackets where arbitrage is beneficial • Evidence that the flow from UI to SI increases as the worker approaches expiration of UI benefits

  45. Reform 2003: Reduction in the SI cap for unemployed workers

  46. Impact of the 2003 reform • Larsson and Runesson (2007), Hall (2008) • Quasi-experimental setting • Treatment and control group • Sick report rates fell by 36 percent in the treated group • But no effect on job finding

  47. SI reforms 2008 • Stricter rules for testing work capacity among SI recipients • Time table for tests (3 months, 6 months) • Max. duration of SI benefits (1 year in general) • Transitions to other benefit systems?

  48. A case for harmonization of compensation in all states of non-work? Work Sick leave Employed Hirings Layoffs No search Unempl. Nonemployed

  49. Supplementary compensation schemes (SC) • Compensation during unemployment, sickness, disability, parental leave… • Collective agreements pertaining to all workers in an industry (bargaining area) • Union-provided compensation restricted to union members • Voluntary schemes for members run by unions

  50. Supplementary compensation, cont’d • SC typically increases the cap on benefits • SC sometimes extends the benefit period • SC may involve lump sum payment upon unemployment • SC often depends on age and/or the duration of employment Example: SC for central government employees implies that there is effectively no cap on UI benefits

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