When Unemployed Leave The System, They Don't Necessarily Join The Labor Force

Date Published: 
Thu, 02/01/2007

David Card, Raj Chetty, and Andrea Weber. Harvard University. February 2007.

The Spike at Benefit Exhaustion: Leaving the Unemployment System or Starting a New Job?” analyzes one of the long standing critiques of unemployment insurance. 

In many studies of unemployment insurance, a large spike is seen in the exit rate from the unemployment system right around the time that the insurance itself runs out. This is usually seen as corroborating the theory that UI incentivizes workers to remain on the program until the last possible second before finding a new job. But using data collected from Austria, the authors find that the spike mostly consists of those who are simply leaving the unemployment system—not because they have new jobs, but because there is no reason to remain registered now that their benefits have run out. 

“We conclude that most job seekers in Austria are not waiting to return to work until their UI benefits are exhausted…the spike in unemployment exit hazards may substantially overstate the degree of moral hazard induced by UI.”