L.A.B.O.U.R.

As you may check, and others already know, I am part of the Labour Market Group in the KPIs project of Nova Economics Club. It is not the first time I am working on the topic and it is definitely not going to be the last since my thesis goes on the same direction. Nevertheless, it is still a path with a short number of footsteps.

I would call it “L.A.B.O.U.R.”, i.e., Learning Activity Based On Unemployment Reactions. Clarifying the reader, the main topic of my interest in Labour Market area is Unemployment, actually. Not only because it has been increasing (as you may check on our reports) but also because it is crucial for Economic Growth, as evidenced by the Okun’s Law – to know more about this read this interesting short article of Paul Krugman on New York Times.

Let us concentrate on the main point of this post: Unemployment Benefits (Reactions). This subsidy, after a period of experiment, was legalized in Portugal on 1985. At the time, unemployment “was one of the most severe social risks” – curiously is, that this sentence is also true if in the beginning I said, “nowadays”, so it seems we have still many things “to learn”. Created to “diminish the unemployment rate and give social protection to the unemployed and to their families”, this system has been receiving a lot of criticisms. Such complaints lead to the Reform contained in the MoU.

A major concern in this crisis is the long-term unemployment (i.e., unemployment with more than one year of duration). To that, one of the responses was to cut the unemployment benefits duration. If that lead to confusion in your mind, let me explain: basically, what was empirically proved already is that, the probability of an unemployed (receiving the benefit) getting out of that state and became employed (although there are other ways out) decreases as time goes by but as the duration of the benefit comes closer to its extension, that probability increases exponentially. Therefore, some authors argue that if the benefit limit duration is pushed backwards, the individual will apply more effort on his job search and thus achieve that peak sooner, thus decreasing the period of unemployment. On the other side, unemployment benefits should also give some time for the individual to search an appropriate job, according to its skills, reservation wage and all other conditions he desires for the new job position.

As you may agree it is not an easy trade-off and maybe that is why the goal of Troika was not yet accomplished. The objective set on the MoU was to reduce the unemployment benefit potential duration to 18 months, i.e., 1 year and a half. However, what is actually in place (to those unemployed since 1st April of this year) is a maximum that can achieve 780 days, i.e., 2 years and 2 months, depending on your age and contributions to Social Security. That would not be a problem if few people benefited from that duration. However, INE estimates that since the beginning of 2009 the number of unemployed (either receiving or not the benefits) with a more than two years duration has doubled from 125 thousand to 250 thousand in the second quarter of 2012 (as you may see in our second report). Moreover, the employment rate, i.e., the percentage of those with more than 15 years old who have a job in Portugal is around 52%. Giving a naked interpretation, half of those with more than 15 years old are working to sustain the other half and those below 15. This generates a sustainability issue to the whole Social Security System.

Diminishing unemployment benefits extension is not the only key but I am confident it is a necessary one to close the door of “one of the most severe social risks”. However, as a science is not made of hints, I intend to apply my Economics Studies on a thesis about this topic. The process to do it will be a Learning Activity Based On Unemployment Reactions. Talking about reactions let me end with two real ones: (two guys) “Hey what is your thesis about, Marta?”; (me) “I’m studying about the generosity of Portuguese Unemployment Benefits’ System and the impact of cuts on the potential duration of the benefits”; (the Spanish guy) “ah they also say Spanish is too generous but I don’t think that cutting is a solution at the moment because there are families starving…”; (me) “oh but you know that if the couple is unemployed we give a extension in the benefit amount”; (the German guy) “what?! You give an incentive to the person with whom the unemployed is married with to go to the unemployment as well?!”.

Happy New Year to you all with health, love and jobs.

About the author: Marta Lopes is a 2nd year Student of the Research Masters in Economics. Her areas of interest are Econometric Applications on Labour Economics and Policy Analysis. She is currently researching on both topics under the supervision of the Professors Pedro Portugal and Susana Peralta.

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