Does Reducing Unemployment Benefits During a Recession Reduce Unemployment? Evidence from a 50% cut in Unemployment Assistance

There is a large economic literature on the labour supply effects of unemployment benefits, with recent work focusing on the interaction between the welfare system and unemployment during the Great Recession. However, many of... [ view full abstract ]

There is a large economic literature on the labour supply effects of unemployment benefits, with recent work focusing on the interaction between the welfare system and unemployment during the Great Recession. However, many of the benefit adjustments examined in the work to date work have tended to be modest in size. In this paper we examine the impact of a series of substantial reductions in unemployment benefit paid to younger claimants in Ireland, one of the countries most affected by the recession. Using administrative data on the population of benefit claimants and a variety of identification strategies we examine the effect of series of cuts targeted at claimants aged between 18 and 25. The size of these reductions ranged from 23% to 51% of a claimant’s original unemployment assistance. In total we examine the impact of 11 different age-targeted benefit cuts between 2009 and 2014. In the majority of cases we find little evidence that the cuts, though substantial, had any significant effect of unemployment duration. This is in keeping with the hypothesis that Irish unemployment during this period was driven by demand rather than supply. The only exception is for the youngest claimants, especially those aged 18 years of age. For this age group, the benefit cut significantly reduced unemployment duration, with an estimated elasticity close to one.