The Effect of Unemployment Insurance on Geographical Mobility
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The Effect of Unemployment Insurance on Geographical Mobility Preliminary version − Please do not quote nor distribute without express consent − Tania Fernandez-Navia∗ May 20, 2019 Abstract This paper investigates the effects of unemployment insurance generosity on work- ers' geographical mobility decisions. Identification is based on an unanticipated re- form that reduced the unemployment insurance (UI) replacement rate (RR) in Spain for workers who were laid-off after July 14, 2012. Using administrative data from social security records and a regression discontinuity design, I find that the UI cut increased the probability to migrate to a different province by 4 percentage points, which represents a 25 percent increase with respect to the pre-reform mean. This result is driven by young educated men with no family responsibilities, and at the top 25 percent of the sample income distribution. The findings also suggest that the increase in mobility is due to actual changes in the province of residence, rather than to an increase in commuting distances. Keywords: local labor markets, labor mobility, geographic mobility, unemploy- ment insurance, natural experiment. JEL Codes: J61, J65, J68 ∗University of Barcelona School of Economics, Department of Statistics, Econometrics and Ap- plied Economics. E-mail: [email protected] I am extremely grateful to L´ıdiaFarr´efor her generous advice. This paper benefited from comments and suggestions by Manuel Bagues, Samuel Bentolila, Werner Eichhorst, Libertad Gonz´alez,Juan F. Jimeno, Concepci´oPatxot, Ra´ulRamos, Jan Sthuler, Judit Vall, and Javier V´azquez-Grenno.I also wish to thank participants at the GSE Summer School in Labor Economics (Barcelona), IAB Perspectives on (Un-) Employment Ph.D. Workshop (Nuremberg), 8th ifo Workshop on Regional Economics (Dresden), Observatori d’An`alisii Avaluaci´ode Pol´ıtiquesP´ubliques(Barcelona), SAEe 43 (Madrid), and at the 24th Spring Meeting of Young Economists (Brussels) for helpful comments and discussions. Financial support from Agaur (FI-DGR) is gratefully acknowledged. 1. Introduction Unemployment rates vary widely across and within countries in the EU (see figure A2).12 To adjust for such spatial disparities, geographical labor mobility is one of the most efficient equilibrating mechanisms (Blanchard and Katz, 1992). Yet, labor relocation is limited in the EU relative to other world regions, specially the U.S. (Decressin and Fatas, 1995).3 Nickell(1997) or Bertola(1999) suggest that rigid labor market institutions (e.g. generous unemployment insurance) can help explain the low mobility rates in the EU. But does the generosity of the unemployment insurance (UI) really deter labor ge- ographical relocation? From economic theory, it is unclear in which direction changes in the UI benefit level affect mobility. On the one hand, generous UI can reduce geo- graphic mobility and search effort by increasing reservation wages (Mortensen, 1977). On the other hand, generous UI can enhance productive job search and mobility by reducing the liquidity constraints (Ben-Horim and Zuckerman, 1987). In this paper, I study the causal effect of reducing the UI benefit level on workers' mobility decisions using quasi-experimental evidence from a reform in Spain. More specifically, I exploit a plausible exogenous 10 percentage points cut in the UI re- placement rate (RR) in the aftermath of the Great Recession. Before the policy implementation, the RR was set at 70 percent of the gross earnings during the first 180 days of unemployment, and 60 percent afterwards. On July 11, 2012, the Span- ish government announced that workers who started an unemployment spell after 1The unemployment rate in the EU-28 was 7.6 percent (standard deviation of 4.01) in 2017, compared to 4.4 percent in the U.S. (standard deviation of 0.96). 2At the sub-national level, Italy and Belgium presented some of the largest disparities in unem- ployment in 2017. As an extreme example, the unemployment rates in Italy ranged from 3.1 percent in Provincia Autonoma di Bolzano to 21.6 percent in Calabria. 3In 2013, less than 5 percent of working-age EU citizens lived in a different EU country than the one where they were born. For the U.S., 30 percent of the working-age population lived in 2013 in a state different from their state of birth (Arpaia et al., 2016). Yet, the U.S. is one country, while the EU is the union of several countries with different culture, language, or labor market institutions. Comparing mobility within countries in the EU with mobility across states in the U.S., we observe that the annual rate of sub-national relocation in the EU is around 1 percent, compared to 3 percent in the U.S. 1 14 July 2012 would have their RR reduced to 50 percent after the sixth month of unemployment. The Spanish context presents an interesting case to study. Spain's unemployment rate has been persistently high and very responsive to economic fluctuations. Over the course of the Great Recession, the unemployment rate spiked from 8.23 percent in 2007 to 26.09 percent in 2013.4 Apart from large unemployment, Spain also presents high and stubborn disparities at the sub-national level (see figure A3). Yet, internal relocation has been persistently low after the 70s.5 In fact, Jimeno and Bentolila (1998) argue that the lack of mobility in response to economic differentials in Spain explains part of the large asymmetries in the regional unemployment rates. In this scenario, it is very important to understand whether the Spanish UI system can be co-responsible for the low rates of internal mobility. To conduct the empirical analysis I rely on administrative data from the Social Security records (Muestra Continua de Vidas Laborales, MCVL). To estimate the causal effect of the UI generosity, I use a regression discontinuity (RD) design and explore the mobility decisions of workers who start their unemployment spells around July 15, 2012. For the causal effect of the reform to be identified, workers who became displaced just above and just below the threshold must be comparable. I verify this assumption by showing that the density of the running variable is smooth at the discontinuity and that workers' features are balanced at baseline. Before going to the main results, the first part of the empirical analysis studies the effect of the UI benefit drop on nonemployment duration and subsequent labor market outcomes. In a recent paper, Rebollo-Sanz and Rodr´ıguez-Planas(2018) studies this 4Notice that the structural unemployment rate in Spain is very large. Even in the economic boom that preceded the Great Recession, unemployment rates were around 8 percent. To make clearer this magnitude, the unemployment rate in the peak of the Great Recession was 10 percent in the U.S., and 11 percent in the EU-28. 5Arpaia et al.(2016) shows that the annual flow of internal migration in 2013 in Spain was around 0.25 percent, compared to around 1 percent in the average of the EU-28 countries. In fact, just 21 percent of Spaniards were living in 2017 outside their province (territorial unit that have an average of 0.9 million inhabitants) of birth. 2 question using a difference-in-differences design and a different sample.6 Rebollo-Sanz and Rodr´ıguez-Planas(2018) shows that the 10 percentage points reduction in the UI decreased the expected nonemployment length by 5.7 weeks (or 14 percent) without affecting the job match quality. Using an RD design, I also find that the policy decreased the expected duration of nonemployment by 14 percent without affecting subsequent labor market outcomes.78 I then turn to the main objective of the paper. This is, I look at whether the UI cut has affected workers' geographical mobility decisions. The results show that the reform increased workers' relocation across provinces by 4 percentage points (a 25 percent of the pre-reform mean). This result is mostly driven by educated and young men, without family responsibilities, and at the top 25 percent of the sample income distribution. In addition, the results suggest that the increase in mobility is mainly towards the big cities, and it happens from the beginning of the unemployment spell. This paper aims to contribute to two paths of literature: (1) the studies that analyse the effects of UI generosity on geographical mobility, and (2) the literature that seeks at understanding the mechanisms driving the positive relation between UI generosity and nonemployment length. The empirical evidence on the relationship between UI generosity and mobility is very scarce and mixed. In their model, Hassler et al.(2005) argue that the large disparities in the generosity of unemployment benefits (UB) between Europe and the U.S. account for the different rates in geographical mobility, with Europe having more 6Rebollo-Sanz and Rodr´ıguez-Planas(2018) uses the 2012 and 2013 waves of the MCVL, while this paper uses waves from 20012 to 2017. 7The positive effect of UI on nonemployment duration is one of the most robust empirical findings in economics. For a very complete review, see Schmieder and Von Wachter(2016). 8Because I have information up to 2017, I also study how the policy affected the probability of becoming a long-term unemployed (LTU) worker. The incidence of long-term unemployment has become very salient during the Great Recession, reaching record levels during its peak and remaining significantly high one decade after its starting (Abraham et al., 2019). In Spain, more than half of the unemployed workers in 2018 were LTU. The findings in this paper suggest that the UI reduction decreased the probability of becoming LTU by 10 percentage points. In terms of magnitude, this represents a 20 percent decrease with respect to the pre-reform mean.