The Effect of Unemployment Insurance Exhaustion

In this article we investigate how the long-term unemployed react to the threat of running out of unemployment insurance (UI) in a system in which other social benefits are available. The empirical analysis is based on very precise administrative records of unemployment spells in Denmark. To identify the effect of UI exhaustion, we exploit the 1999 legislative change in the duration of benefit that progressively reduced regular UI entitlement from five to four years. According to time of entry into the UI system, all UI recipients had their potential UI period shortened. We use a competing risk model to estimate the conditional probability of leaving unemployment to enter employment or receive other social benefits. We restrict our analysis to men aged 25-44 in 1998. Our results show that even for men having an initial UI entitlement for 4 years the threat of running out of UI indeed motivate them to find a job.