Labor market effects of the Portuguese unemployment insurance reform

The Portuguese labor reform of 1999 increased the maximum duration of unemployment benefits only for workers in specific age brackets. Workers with ages outside of the affected brackets had no change in the maximum benefit duration. Workers between 30 and 34 years old, for example, had the maximum benefit duration extended from 15 months to 18 months. But for workers between 35 and 39 years old, the maximum benefit duration was unchanged at 18 months. The paper uses the latter group to benchmark the effects of the reform on the former group. The three-month increase is large when compared to similar reforms in other countries. The reform kept the amount of the benefit and other parts of the social security system constant.

Using high-quality administrative data, this paper studies the effects of the quasi-natural experiment that is the change in maximum duration of unemployment benefits, within the context of a labor search model. The labor search model has predictions about how the size of the labor force, the unemployment rate, and the duration of unemployment should respond to the reform. The model does particularly well in explaining the increase in the average duration of unemployment following the increase in the duration of benefits: for the age group 30 to 34, the duration of unemployment increased from 23.7 to 25.4 months while the model predicts an increase from 23.7 months to 24.3 months.

Click here to go to the paper by Álvaro A. Novo and André C. Silva.