Is cutting unemployment benefits during a recession an effective way of reducing youth unemployment?

While there is a large literature on the labour supply effects of unemployment benefit reforms, much of this work focuses on the responses of prime-age workers and was carried out before the Great Recession. Despite the substantial interest in youth unemployment, little is known about the impact of unemployment benefit reform on young claimants during severe economic downturns. In the research highlighted here Dr. Aedín Doris, Professor Donal O'Neill and Dr. Olive Sweetman of the Labour Economics Group at Maynooth University examine the labour market response of claimants aged 18-21 to a substantial cut in unemployment assistance payments introduced in Ireland in response to the Great Recession. They use a quasi-experimental approach that exploits the fact that only new claimants were affected by cuts that reduced the weekly benefit rate from €204.30 to €100, a reduction of over 50%. 

The analysis is based on administrative data on welfare duration covering every new unemployment claim initiated between 2007 and 2014. Despite the substantial reductions in benefits that were implemented, Doris, O'Neill and Sweetman find no evidence that these cuts affected the unemployment durations of those aged 20-21. However, for the very youngest claimants, they find robust evidence that the benefit cut substantially shortened unemployment durations. For 18 year olds they find that the cut in benefits reduced unemployment durations by over a year, implying a significant duration elasticity of 1.04. The corresponding elasticity for 19 year olds is similar at 1.08; however, the treatment effect is not precisely estimated for this group. 
 
To examine the effects of the benefit cuts in more detail, Doris, O'Neill and Sweetman decompose the overall effect into the components due to different exit states. This analysis shows that no one exit state dominated the large treatment effect estimated for 18 year olds. Furthermore, the smaller effect for older age groups was evident across all exit states. They consider two possible explanations for the differences in behaviour across age groups. To explain differences in exits to training schemes, they focus on differences in the job-readiness of the claimants. To explain differences in exits to work, on the other hand, they consider potential interactions between unemployment benefits, wage offers and minimum wage legislation. Their findings in this regard provide a useful reminder that the impact of changes to unemployment benefits may depend on other labour market policies and that such interactions between policies should be taken into account when considering benefit reforms.

A working paper version of the paper is available here.