The effect of unemployment benefits on re-employment rates: Evidence from the Finnish unemployment insurance reform

In January 2003, the unemployment benefits in Finland were increased for workers with long employment histories. The average benefit increase was 15% for the first 150 days of the unemployment spell. At the same time severance pay system was abolished. In this paper we evaluate the effect of the change in the benefit structure on the duration of unemployment by comparing the changes in the re-employment hazard profiles among the unemployed who were affected by the reform to the changes in a comparison group whose benefit structure remained unchanged. We find that the change in the benefit structure reduced the re-employment hazards by on average 17%. The effect is largest at the beginning of the unemployment spell and disappears after the eligibility period for the increased benefits expires.