Unemployment Benefits and Incentives in Hungary: New Evidance

Abstract

This paper analyses the Hungarian unemployment insurance (Ul) benefit reform of 1993, which led to the creation of a less generous benefit system. We investigate a sample of unemployment spells which are drawn from the Hungarian Ul register directly before and after the reform came into force. The focus of the microeconometric duration analysis lies in the interaction of the exit behavior of unemployed people with the Ul system. As exit states we consider employment, subsidised employment, training and (early) retirement. Our results are in support of the hypothesis that the benefit reform increased, significantly, the transition rates from unemployment to all the labour market schemes. In particular, aged people responded to the benefit reform with a substantial rise in their transition rates to (early) retirement. A specific characteristic of our inflow cohort has to be taken into account for the analysis of the employment hazards. A large proportion of our sample represents workers who are likely to be on recall. Their job hazards are extremely sensible to seasonal labour demand fluctuations. We identify these workers and concentrate the analysis of the benefit reform on those workers who are not on recall. They represent workers who most likely were made redundant due to the restructuring of the Hungarian economy. The benefit reforms only slightly increased their speed of return to work. Furthermore, the transition rates to employment are found inelastic to the replacement rate with the exception of women who are below 30 years of age.