Unemployment insurance and job turnover in Spain

Yolanda F. Rebollo-Sanz (2012)

Unemployment insurance and job turnover in Spain

Labour Economics, Vol 19, Issue 3, pp. 403-426

Research Highlights

The study reported in this paper shows that the current design of the UIS might provide incentives

for workers and employers to increase labour market turnover. In particular, it reveals that at the

point where the employee qualifies for unemployment benefits there is a spike in the layoff hazard

rate, but none in the quit hazard rate. Hence, the UIS appears to have a negative effect on

employment duration while increasing unemployment incidence. We also find a strong impact of

the UIS on unemployment duration. The recall and new job hazard rates increase notably around the

time of benefit exhaustion. Interestingly, the incidence of the UIS on employment and

unemployment transitions is the largest for women and temporary workers, that is, for workers with

loose attachment to the labour market and who suffer the largest turnover rates in Spain. Another

interesting difference that emerged in the analysis is that the spike in the recall hazard rate for

permanent workers takes place just one month before the exhaustion of unemployment benefits.

Hence, the results found show that workers and firms seem to have some influence on the timing of

the outflow from both employment and unemployment and use it to their advantage whenever the

current characteristics of the UIS allow. However, these incentives might generate excessive labour

market turnover, with shorter employment spells and longer unemployment spells. Notice that the

importance of these results rests on the fact that the UIS seems to reduce the time spent in

employment throughout an individual’s working life both directly increasing the probability of exit

from employment and indirectly increasing unemployment duration. These findings need to be

considered in the Spanish economy, in which over 80% of newly-signed contracts are temporary

and more than 30% of unemployed workers return to their previous firm.

Given these results, a potential reform of the UIS addressed to reduce the average unemployment

duration and the unemployment rate should consider both sides of the labour market. In one side,

the current design of the UIS distorts firm’s hiring and firing decisions. On the other side, it also has

behavioural consequences on the worker’s decisions.



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