Unemployment insurance and moral hazard

Moral hazard is a well known problem in all forms of insurance, unemployment insurance being no exception. The problem being that unemployed workers who are insured may not do enough in the way of searching for a job or may turn down job offers that they do receive. But trying to get a handle on how large this effect is very difficult. This is an area where field experiments can help: randomly assign people to treatment groups where there is an increased level of the monitoring of claimants relative to the control group. Claimants in the treatment group have to make more frequent visits to the employment office and face questioning about their search behaviour. And see what happens.

Such an experiment was carried out in Hungary in 2003. The results are reported in a paper, The e ffect of monitoring unemployment insurance recipients on unemployment duration: evidence from a field experiment by John Micklewright and Gyula Nagyy. The paper reports results which show marked differences between the sexes in the effect of treatment on benefit duration and outflows to employment. Treatment has quite a large effect on women aged 30 and over, especially for those married with a working husband, while they typically find no effect for younger women or for men.

Micklewright and Nagyy note that,

There are (at least) two alternative explanations for the experiment’s results (‘explanations’ in the sense of descriptions of the observed behaviour). First, search effort of men and younger women is already high and the marginal return to additional effort encouraged by the treatment is zero. Men and younger women in the control group make frequent visits to employment offices to access vacancies of their own volition, so their contact with the offices is no lower than for their counterparts in the treatment group. For the older women, treatment does bring more contact in practice with the offices’ vacancies compared to the control group, and there is a positive return to additional search stimulated by treatment in terms of job offers generated.

Second, search effort of men and younger women is not high in the absence of treatment but the treatment does not produce additional search. The questions faced by the treatment group during visits to the employment office are answered with equanimity, with no disutility resulting. Treatment does mean in practice that additional visits are made to the employment offices but these visits do not result in better contact with vacancies. Only the women aged 30+ take advantage of the increased access to information on vacancies through the office visits. And only these women experience disutility from the additional visits and the questioning about job search, which increase the cost of leisure while unemployed, and react to a threat of sanctions if they do not increase their search activity.

Unfortunately Micklewright and Nagyy do not have the detailed information on actual search activity of both the treatment group and the control group that would allow them to judge between the competing explanations.