Extending the duration of unemployment insurance (UI) benefits is one of the most important policy instruments to ease economic hardships of job losers – this is especially true for older workers who might be less likely to find a new job. Yet, a prolonged duration of unemployment benefits could also provide wrong incentives as older workers might exploit too generous rules as the first step into early retirement. A new IZA discussion paper by Lukas Inderbitzin, Stefan Staubli and Josef Zweimüller studies this trade-off by analyzing the impact of extended UI benefits on employment and retirement behavior of older workers in Austria.
The authors find the extended duration of unemployment benefits increases the probability of early retirement: a job loser aged 50-54 is 17 percentage points more likely to withdraw from the labor market when he is eligible for the longer benefit entitlement period. The paper finds that the Austrian program also affected the pathways into early retirement: the 17 percentage point increase in early retirement is associated with a 12.6 percentage point increase in a subsequent disability insurance take-up. From a welfare perspective, the authors conclude that Austrian unemployment insurance rules for older workers were too generous and the regional extended benefit program was a suboptimal policy.