Reference-dependent job search: Evidence from Hungary (DellaVigna et al. 2014)
DellaVigna, S., Lindner, A., Reizer, B., & Schmieder, J. (2014). Reference-dependent job search: Evidence from Hungary. Unpublished working paper.
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- The study’s objective was to empirically test a behavioral model of job search using a reform in Hungary’s Unemployment Insurance (UI) program.
- The authors compared rates of exit from unemployment in groups of claimants who entered UI before and after the reform’s implementation in November 2005. The authors used social security and UI data from Hungary’s Institute of Economics and National Employment Service.
- The study found support for the behavioral job search model and theorized that approximately budget-neutral transitions to two-step UI systems could speed claimants’ exit out of unemployment.
- The quality of causal evidence presented in this report is low because it cannot account for factors other than the UI program that also changed over the period of study and could also have influenced the outcomes of interest. This means we are not confident that the estimated effects are attributable to Hungary’s 2005 UI reform; other factors are likely to have contributed.
Features of Hungary’s Unemployment Insurance Reform
Before 2005, Hungary’s UI system had two tiers. In the first tier, benefit duration depended on a worker’s previous contributions to social security, with a maximum duration of 270 days, and benefit amount depended on earnings in the previous year. After reaching their maximum duration, claimants who remained unemployed became eligible for Unemployment Assistance, which provided the same benefits to everyone regardless of past earnings.
On November 1, 2005, Hungary introduced a reformed, two-step UI system. In the first step, which lasted for half the maximum first-tier duration, or at most 90 days, benefit amounts were calculated based on the claimant’s previous earnings, with a lower replacement rate than under the previous system (60 percent instead of 65 percent), but substantially higher minimum and maximum benefit amounts than the previous system. In the second step (days 91 to 270), every claimant received the same benefit amount regardless of previous earnings. The total UI duration for each claimant and eligibility for Unemployment Assistance remained the same. The authors noted that for those with high pre-UI earnings, the overall payout under both systems would be approximately the same because lower benefits in step two (days 91-270) offset higher benefits in step one (days 1-90).
Features of the Study
The authors proposed a “reference-dependent” model of job search where a reference point is given by consumption in the recent past and workers are loss-averse with respect to payoffs below the reference point. So, for a newly unemployed worker, the reference point would be recent earnings before becoming unemployed. Because the UI benefits are substantially below previous earnings, the worker finds this painful and tries hard to find a new job. As time goes on and the worker remains unemployed, he becomes accustomed to the lower UI benefits, and job search effort decreases. However, as the exhaustion of UI benefits approaches, the worker anticipates the even lower benefit amount he will receive, and resumes diligently job searching.
To test this theory, the authors compared the outcomes of a group of UI claimants who entered the system between February and October 2005, before the reform’s implementation in November 2005, to those of a group of claimants who entered the system between February and October 2006, after the reform went into effect. If the theory were supported, the exit rate from unemployment should be higher around the 270-day exhaustion date for workers under the pre-reform system than for workers in the post-reform system because they faced a much steeper decline in benefits upon UI exhaustion. Measuring time as days since UI entry, the authors calculated the reform’s impact on the probability of exit from UI separately in each two-week time period as the difference in probability of exit between members of the pre- and post-reform groups, controlling for characteristics such as age, gender, years of education, and previous earnings.
- The study found support for the reference-dependent model of job search. Rates of exit from UI were higher in the period immediately preceding the exhaustion of regular benefits and transition to Unemployment Assistance for workers receiving UI pre-reform compared with those receiving UI post-reform. The authors claim this is consistent with the higher anticipated loss in consumption for workers receiving UI pre-reform.
Considerations for Interpreting the Findings
The authors compared reemployment trends among UI claimants before the UI reform took place to reemployment trends among claimants after the reform took place. Even including controls for the demographic characteristics and earnings histories of the two groups, there remains a strong possibility that other changes in the economy and the UI system that could have influenced reemployment rates were simultaneously taking place. Because the study does not include a comparison group of unaffected individuals, it is not possible to attribute the observed differences in outcomes to the reforms alone.
Causal Evidence Rating
The quality of causal evidence presented in this report is low because the author’s analysis did not account for factors other than the UI program that could have changed over the period of study and influenced the outcomes of interest. This means we are not confident that the estimated effects are attributable to Hungary’s 2005 UI reform; other factors are likely to have contributed.