Unemployment Compensation and the Risk of Unemployment The Case of Argentina

1. Unemployment Compensation and the Risk of UnemploymentThe Case of Argentina Ana Lucía Iturriza (ARGENTINA) JJ/WBGSP Institute of Social Studies, 2005

2. The Topic As a JJ/WBGSP student of Economics of Development I was interested in choosing a topic related to: • MDGs • Poverty Reduction • The functioning of labor markets is a crucial determinant for poverty reduction. • Income generation / distribution

3. The Context • Size of the labor market (2003) • Poverty and Unemployment (2000-03)

4. Compensation Programs • Unemployment Insurance, in place since 1991. • Unemployment Assistance (“Plan Jefes”), in place since 2002.

5. Research Question • I test the standard prediction in labor economics. • Does unemployment compensation affect the incidence or the duration of unemployment? • If so => the programs may be creating disincentives to reenter the employment. • Particularly relevant for an assistance program such as Plan Jefes. • I discuss whether to consider Plan Jefes participants into the employment (broad definition of employment) or not (restrictive definition of employment).

6. The Data • Permanent Household Survey (EPH) • Demographic indicators (age, sex, marital status, position in the household, region of residence) • Labor market variables (condition of activity, time related variables, characteristics of last occupation when relevant) • Benefit related variables (unemployed receiving insurance, assistance or condition of applicant). • Panel merging two rounds: October 2002 and May 2003. • Transition matrix. • 21,000 observations of people in working age.

7. Empirical Strategy • Econometrics to estimate the impact of Insurance and Assistance on the probability of transiting from UNEMPLOYMENT to EMPLOYMENT • LOGIT MODELS => Incidence - Probability • COX MODELS => Duration - Hazard rate • NON PARAMETRIC MODELS => Empirical pattern of exits from unemployment. • Analysis performed for two different scenarios. • Plan Jefes participants are employed (broad definition of employment) • Plan Jefes participants are unemployed (restrictive definition of employment).

8. Example of the Data Used

9. Example of the Results Obtained

10. Interpretation of the Results • Benefit related variables • Unemployment insurance: Negative but not significant. • Unemployment Assistance: Negative and significant. Compared to non-assisted workers, the probability of transitioning to employment is 31 percentage points lower and the hazard rate is more than twice as less among the assisted. • Condition of Applicant: Negative but not significant. • Other regressors that predict the transition • Age, sex, position in the household, region of residence.

11. Conclusions • Unemployment insurance • It was not found to affect the employment behavior of participants. • Assistance program (Plan Jefes) • Under the broad definition of employment Plan Jefes favors reinsertion into the employment. • Under the restrictive definition of employment, strong demotivating effects associated with the use of Plan Jefes are found. • Policy instruments should be reviewed in accordance with the objectives for which they are created, particularly distinguishing between employment creation and other forms of social protection.

12. Drawbacks • Plan Jefes creates obvious moral hazard problems (through its stipulation that the duration of unemployment assistance is unlimited). • Conclusion insufficiently developed. • Lack of clarity regarding the policy implications and recommendations derived from the study. • The effects of the crisis on the labor market should be more carefully considered. • The analysis could be improved with recent contributions on Argentinean economic crisis and recovery, for instance Calvo’s paper.