Bringing Them In or Pushing Them Out? The Labor Market Effects of Pro-cyclical Unemployment Assistance Reductions

Abstract

We exploit variation from an unanticipated labor market reform in 2012 Spain to causally estimate the effects of pro-cyclical unemployment assistance (UA) reductions on job search behavior and re-employment outcomes. Shorter benefit durations effectively bring individuals back to work and reduce non-employment duration. However, they also induce displacements out of the labor force and strong substitution patterns towards other, less generous, welfare programs, highlighting the social insurance role of long-term benefits during economic downturns. Despite the sharp drop in non-employment duration, we also document a significant decrease in re-employment wages, consistent with reduced workers' reservation wages and limited duration dependence. Heterogeneity analyses show that relatively younger workers are the ones that are brought back into re-employment in lower-quality jobs, while older workers are pushed out of the labor force. Looking at responses over the non-employment spell, we provide evidence against the standard assumption of forward-looking behavior of benefit recipients, as we do not detect any change in workers' behavior before benefit exhaustion. Overall, we estimate that the reform induced only moderate fiscal savings for the government.