Sanctions and the exit from unemployment in two different benefit schemes

This paper investigates the effect of benefit sanctions on the exit rate from unemployment using a unique set of rich register data on unemployed Finnish individuals. The timing-of-events approach is applied to distinguish between the selection and causal effects of sanctioning. The results imply that the effect of sanctions differs according to the benefits received. Sanctions encourage unemployed individuals receiving flat-rate labour market support (LMS) to find jobs, whereas unemployed individuals receiving earnings-related (UI) allowances to leave the labour force. The encouraging effect of sanctions on active labour market policy programmes is relatively small and statistically significant only among LMS recipients.