The impact of monitoring and sanctioning on unemployment exit and job-finding rates

Empirical evidence on the impact of search monitoring

Although there is an extensive empirical literature on the combined effects of reforms of search requirements, monitoring, and search assistance for unemployment benefit recipients, there are fewer studies that separately distinguish the effects of changes in job search monitoring from changes in these other aspects of the benefit regime. This literature has focused on the effects of monitoring on benefit recipients, mostly ignoring potential monitoring effects on inflows to unemployment, with partial exceptions [3], [4].

Six studies that credibly separate the effects of monitoring from those of other aspects of unemployment insurance reform packages and from selection effects are reviewed here (Figure 1). Three of the studies randomly assigned subjects into treatment and control groups (randomized controlled trials)—two in the US and one in Hungary. The remaining three studies used quasi-experimental approaches that exploit non-random but plausibly exogenous assignment to treatment and control groups to identify monitoring effects.

Four of the six studies report positive and statistically significant effects of job search monitoring on unemployment exit rates and/or job entry rates, corresponding with reduced unemployment duration. The magnitude of these estimated effects vary—there are differences in the extent of the changes in monitoring being studied—but in a fairly narrow range. For example, one study finds that tougher monitoring leads to a 10% reduction in unemployment benefit duration [3], another finds a 10–16% reduction in unemployment duration [5], and a third finds a 23% increase in the probability of finding employment within eight months [6].

The other two studies report positive but statistically insignificant monitoring effects on unemployment exit rates or job entry rates. In one case, this may reflect the combination of small sample size and fairly minor changes to monitoring intensity [7]. The other study, which examines a larger change in monitoring intensity, also finds no overall statistically significant effect but does report statistically significant and positive 
effects on job entry rates for women aged 30 years and above [8]. It also finds evidence that the size of the monitoring effect on job entry varies negatively with the local unemployment rate.

A few of the studies look at the effects of monitoring on other outcomes, with mixed results. One finds a significant effect on switching from unemployment benefits to other welfare benefits, interpreted as a move out of the labor market [5]. Another finds no effect on dropping out of the labor force [6]. One study examines monitoring effects on earnings in the year following the initiation of the unemployment insurance claim, and finds little impact [3]. It also finds no significant effect on the probability of re-entering unemployment within a year. Another study finds a small reduction in inflows to unemployment resulting from suspension of search monitoring, perhaps caused indirectly by reduced outflows from unemployment and the resulting removal of high-risk individuals from the at-risk population [4].

Empirical evidence on the effect of benefit sanctions

The sanctions literature has concentrated on estimating the effects of sanctions imposed on current recipients of unemployment benefits, mostly ignoring the effect of eligibility restrictions (such as voluntarily leaving a job) on inflows. Sanctions on unemployment benefit recipients can be imposed for failing to search actively for a new job, rejecting a suitable job offer or offer of a placement in an employment or training program, and for violating other administrative requirements, such as failing to show up for advisor interviews.

Both the threat of sanctions (the ex ante or threat effect) and the imposition of sanctions (the ex post effect) can affect the behavior of unemployed workers receiving benefits. Most of the sanctions literature focuses on the ex post effects, despite the potential importance of ex ante effects. In jurisdictions where workers who have committed an unemployment insurance program infraction receive warning letters before a sanction is imposed, the ex post sanction effect can be separated into a warning effect (that a sanction is or may be coming) and an imposition effect once the sanction has been imposed.

Figure 2Figure 3 summarizes ten empirical studies of the effects of sanctions that have a clear strategy for dealing with the main identification problem: separating the effects of sanctions from the effects of differences in observed and unobserved characteristics between unemployed workers who receive a sanction and those who do not (selection effects). Specifically, it seems likely that unemployed workers who receive a sanction have characteristics that would otherwise reduce their probability of unemployment exit or job entry [9], [10]. Failure to account for this selection effect is likely to lead to underestimates of the effects of benefit sanctions on these outcomes.

In the absence of randomized controlled trials of sanctions, the studies rely on econometric analysis of administrative data, and most use the timing-of-events approach to estimate the ex post effects of sanctions. This approach exploits the exact timing of sanction events to identify causal effects. Although the approach is not without its critics, it is widely used and accepted, and its advantages generally outweigh its disadvantages.

All of the in-scope studies examine effects of sanctions using European data, and nearly all adopt the timing-of-events approach. These studies all find that receiving a sanction significantly increases the rate of exit from unemployment benefits, the rate of job entry, or both. The magnitude of these measured effects varies, but two upper-end estimates suggest that receiving a sanction more than doubles the unemployment benefit exit rate and the job entry rate [9], [10]. In Switzerland, unemployment benefit recipients receive sanction-warning letters in advance of the imposition of a sanction, so the two studies using Swiss data are able to separately identify the effect of receiving a warning letter from that of receiving a sanction [2], [11]. The studies find similar effects in both cases on the unemployment benefit exit rate and the job entry rate.

Some studies examine evidence for heterogeneous effects of receiving a sanction. Two find larger positive effects on the job entry rate and benefit exit rate for women than for men in the Netherlands [1], [12]. One of them also finds differences in sanction effects across different (sectoral) unemployment insurance agencies [1]. A study on Sweden also finds a positive effect of receiving a sanction on job entry that is larger for women than for men, as well as differences in effect by age, but no difference by education level or local unemployment rate [13]. A study for Germany finds differences in sanction effects by age, with increases in regular employment driven primarily by younger unemployed workers receiving sanctions. Male immigrants in Denmark are found to be more responsive to sanctions than native male Danes, and married workers are more responsive than unmarried [10].

Examinations of whether the effects of sanctions vary by when in the unemployment spell they are imposed find mixed results. For Germany, one study finds that the effect of sanctions is weaker the further into the unemployment benefits period it is imposed. A study for the Netherlands finds a similar pattern for women, but the opposite for men [12]. Two studies find that the effect of receiving a sanction diminishes over the time that has elapsed since the sanction was imposed. Another study finds no effect of elapsed time [13].

Although the duration and severity of sanctions vary across countries, other cross-country differences make it difficult to draw general conclusions about the relationships among sanction duration, severity, and effects from this source. Some studies have exploited within-regime variation in sanction severity to examine this issue—with, however, mixed findings. One study finds no evidence for significant differences in effects between sanctions of different severity, although there is only limited variation in sanction severity in their data [9]. A study on Denmark finds evidence that more severe sanctions may have larger effects on the exit rate from unemployment benefits [10].

A few studies look at the effects of sanctions on other outcomes. Some find significant positive effects of sanctions on the probability of leaving the labor market [2]. A study on Sweden finds negative effects of sanctions on post-unemployment wages—consistent with a reduction in the quality of job matches—and on hours worked [13]. It also finds that these negative effects persist, and that they may increase in magnitude for up to four years after the return to work. A study on Switzerland finds a negative effect on post-unemployment wages averaged over 30 months and a negative effect on job duration [2].

Because few people actually receive sanctions in most countries, some researchers argue that the main way sanctions influence behavior is through their threat effect. Evidence from laboratory experiments with students is consistent with this interpretation. Of the ten studies considered here, only two examine the effects of the threat of sanctions using observational data. One finds evidence of a shorter duration of unemployment benefits in areas in Switzerland where the threat of sanctions is stronger than elsewhere [11]. Another study, also on Switzerland, finds a similar result, along with a positive effect on job entry rates [2].