Labor Market Insurance Policies in the Twenty-First Century — Annual Review of Economics (2023)

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Annual Review of Economics article, Annu. Rev. Econ. 2023, 15:1–22, Labor Market Insurance Policies in the Twenty-First Century, by Tito Boeri and Pierre Cahuc, first published as a Review in Advance on February 28, 2023. The abstract states that the COVID-19 crisis was a stress test for unemployment insurance schemes and that there was also a considerable expansion of short-time work schemes. It states that the authors survey research on schemes complementary to unemployment insurance, focusing on short-time work, partial unemployment insurance and wage insurance, compare their properties to standard unemployment benefits, and present main empirical results on their effects. The introduction states that in advanced economies about 15% of jobs are destroyed every year and about the same proportion is created.

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Boeri, Tito & Cahuc, Pierre (2023) Labor market insurance policies in the twenty-first
century. Annual Review of Economics, 15(1).
https://doi.org/10.1146/annurev-economics-082322-035621


https://researchonline.lse.ac.uk/id/eprint/123549/


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Licence: Creative Commons: Attribution 4.0




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                                                        Annual Review of Economics
                                                        Labor Market Insurance
                                                        Policies in the Twenty-First
                                                        Century
                                                        Tito Boeri1,3,4,5 and Pierre Cahuc2,3,4
                                                        1
                                                            Department of Economics, Bocconi University, Milan, Italy; email: tito.boeri@unibocconi.it
                                                        2
                                                            Department of Economics, SciencesPo, Paris, France
                                                        3
                                                            Centre for Policy Research (CEPR), London, United Kingdom
                                                        4
                                                            Institute of Labor Economics (IZA), Bonn, Germany
                                                        5
                                                            Centre for Economic Performance, London School of Economics, London, United Kingdom




Annu. Rev. Econ. 2023. 15:1–22                          Keywords
First published as a Review in Advance on
                                                        partial unemployment insurance, wage insurance, short-time work
February 28, 2023

The Annual Review of Economics is online at             Abstract
economics.annualreviews.org
                                                        The COVID-19 crisis was a stress test for unemployment insurance schemes
https://doi.org/10.1146/annurev-economics-
                                                        as it involved a sudden and unexpected shutdown of a very large set of
082322-035621
                                                        activities. This forced countries to introduce, often from scratch, income
Copyright © 2023 by the author(s). This work is
                                                        support schemes for workers under new forms of employment and for the
licensed under a Creative Commons Attribution 4.0
International License, which permits unrestricted       self-employed. There was also a considerable expansion of short-time work
use, distribution, and reproduction in any medium,      schemes. As we move past this crisis, labor markets are likely to be char-
provided the original author and source are credited.
                                                        acterized by substantial labor reallocation, and major innovations in labor
See credit lines of images or other third-party
material in this article for license information.       market policy will be required to smooth consumption of workers involved
                                                        in this reallocation. We survey the large body of research on schemes com-
JEL codes: H5, J6
                                                        plementary to unemployment insurance to reduce the costs of reallocation.
                                                        We focus on short-time work, partial unemployment insurance, and wage
                                                        insurance and compare their properties to those of standard unemployment
                                                        benefits. Next we present the main empirical results on the effects of wage in-
                                                        surance, partial unemployment insurance, and short-time work. In the final
                                                        section we discuss directions for further research.


                                                                                                                               1
    1. INTRODUCTION
    The reallocation of jobs is a huge process in all countries. In advanced economies, about 15% of
    jobs are destroyed every year and about the same proportion is created. The reallocation of jobs is
    accompanied by an even more important reallocation of manpower across jobs. This phenomenon
    is an essential ingredient of productivity growth. It is linked to globalization and technological
    progress, which create new products and new business models that are likely to foster growth
    and improve well-being for all. However, this structural change also has social costs. It is well es-
    tablished that job loss can have significant detrimental effects on the earnings of individuals for
    decades, especially for long-tenured workers who are dislocated. This is observed in the United
    States, where earning inequalities are drastic and the welfare state is limited, but also in Euro-
    pean countries, where the social safety net is tighter and earnings inequalities are less pronounced
    (Sullivan & von Wachter 2009, Davis & von Wachter 2011, Bertheau et al. 2022). Technological
    progress changes the nature of jobs, too. With the automation of tasks and the spread of online
    platforms, the new economy reshapes workplaces, inducing a substantial rise in the incidence of
    such alternative work arrangements as temporary work, part-time work, self-employment, and the
    new kinds of work emerging in the online gig economy (Katz & Krueger 2019). These changes
    offer a host of opportunities for more employee-friendly options, such as flexible schedules and
    working from home, which can favor the entry of persons, in particular women with young chil-
    dren, who might have experienced barriers to entering the traditional workforce (Mas & Pallais
    2017); but they also raise concerns about job quality and stability.
        The COVID-19 pandemic has accelerated this process. On the one hand, it has forced a
    huge increase in remote working blurring the border between dependent employment and self-
    employment and changing the location of work well beyond the lockdown periods. On the other
    hand, it has also induced a major reallocation of workers across jobs, and further reallocation is
    expected to occur in the years to come. The recreational and hospitality sectors have been par-
    ticularly affected by this increased reallocation (Aaronson et al. 2021, David 2021) that, unlike in
    previous recessions, occurred not only within sectors, but also across sectors (Barrero et al. 2021).
    This phenomenon is likely to be amplified by the green transition (IMF 2022).
        Unemployment insurance (UI) plays a key role in providing growing numbers of individuals
    with a degree of support in maintaining a flow of income while transitioning between jobs. By
    allowing liquidity-constrained workers to smooth consumption when they lose their jobs and by
    providing resources to help them look for jobs and acquire new skills, UI can improve the well-
    being of workers and facilitate their reallocation toward more productive jobs. However, standard
    UI requires rather demanding entitlement conditions in terms of length of contribution peri-
    ods and imposes a strong separation between employment and nonemployment spells. In a labor
    market in which workers enter and exit unemployment at high frequencies and many jobs are part-
    time or involve a few hours per week, as in gig activities, standard unemployment benefits would
    underinsure workers and leave entire segments of the workforce without any shelter (Harris &
    Krueger 2015).
        In this article we survey the large body of (mostly applied) research on schemes reducing the
    costs of reallocation complementary to UI. Our attention is on the three main schemes adapted
    and used more intensively during the health crisis: short-time work (STW; preventing layoffs by
    subsidizing hours reductions), partial UI (enabling workers to combine unemployment benefits
    with low income jobs), and wage insurance (WI; offering a temporary wage subsidy to workers
    changing jobs). Designing effective schemes of these types is not an easy task because there are
    important selection and moral hazard issues, as in all insurance systems.
        One needs to know in detail how systems work in practice and how people behave in order
    to understand systemic impacts and thus be in a position to evaluate the effectiveness of policies.

2   Boeri • Cahuc
This article reviews how part-time unemployment benefits, STW, and WI operate in different
OECD countries and what is known about their impact from both a theoretical and an empirical
perspective. The article is organized as follows. Section 2 is devoted to STW, Section 3 to part-
time unemployment benefits, and Section 4 to WI. Section 5 offers concluding comments on how
these schemes can cope with the new challenges imposed by the health crisis.

2. SHORT-TIME WORK
2.1. Short-Time Work Regulations in OECD Countries
STW is a public program intended to preserve jobs in firms experiencing temporarily low rev-
enues by providing income support to employees whose hours of work are reduced. STW schemes
provide additional funds so that employees can reduce their hours of work without a propor-
tional reduction in their take-home pay. In general, the employees earn less than they do when
they work usual hours but more than they would receive in unemployment benefits. The cost of
supplementing the employee’s income is typically shared by the employer and the state.
   The Great Recession at first, and the pandemic later on, induced most OECD countries to
introduce, often from scratch, schemes of this sort or to expand the scope of existing ones (OECD
2020). STW is indeed designed to prevent large-scale job losses when firms are facing temporary
adverse shocks, just as those experienced during the lockdown measures taken by most OECD
countries in 2020. A few countries (Greece, Latvia, Slovenia, and the United Kingdom) opted for
introducing a furlough scheme instead.
   STW schemes differ from temporary layoffs or furlough schemes (mandatory and unpaid
leaves of absence), widely used in the United States also during the pandemic,1 in that they do
not necessarily require the worker to reduce working hours to zero. In other words, they oper-
ate to a large extent on the intensive margins by encouraging employers to adjust hours of work
rather than discontinuing, even temporarily, the employment relationship. Moreover, there is a
much stronger commitment to preserve the job in a STW than in a furlough scheme.2
   At the same time, STW entitlement conditions concern firms rather than workers, and typically
subsidies are anticipated by employers and then repaid by the social security administration. As the
pandemic hit the small business sector much more than during previous recessions, STW had to
be extended to many small firms that were not initially eligible for it. This required transforming
STW into a kind of credit line quickly usable by small businesses, as self-employed workers with
dependent employees dramatically needed liquidity to cover their payroll while facing a free fall
of their revenues during the lockdown. While temporary loans to firms could in principle be
preferable to STW in dealing with liquidity constraints, they generally required longer procedures
for disbursement than STW.

2.1.1. The design of short-time work schemes. The design and regulation of STW schemes
vary greatly across countries (Cahuc & Carcillo 2011, Hijzen & Venn 2011). Firms are usually
required to meet a number of eligibility criteria to enter into STW arrangements. These criteria
include evidence of slowdown in their economic activity in terms of some reduction in production
or sales, the existence of collective agreements which allow take-up of STW, and consultation with

1 Half of the US states had STW schemes in place even before the pandemic. The United States also had a sort

of STW scheme for small firms, notably the Paycheck Protection Program providing small firms with loans
to cover labor costs (Autor et al. 2022). However, the allocation of these resources was difficult and take-up
rates were relatively low.
2 Borland & Hunt (2021) estimate that around one-third of temporary layoffs were actually recalled during

the pandemic in Australia. Torrence & Rejda (1987) estimate that the costs of retraining workers involved in
temporary layoffs may well exceed the costs of STW.

                                                         www.annualreviews.org • Labor Market Insurance Policies   3
    employees or individual agreements. While some countries offer STW to all workers irrespective
    of their employment status (Denmark, Finland, Ireland, Spain, United Kingdom), in most coun-
    tries workers qualify for STW only if they have a minimum contribution record. This prevents
    many workers with fixed-term contracts or part-time workers with few working hours from be-
    ing eligible for STW. In the course of the Great Recession and in the pandemic, these eligibility
    criteria were relaxed for workers with atypical contracts in many countries.
        STW is often conditional on actions to be taken by firms or employees. These include the
    commitment not to dismiss employees for a certain period after STW compensation comes to an
    end, job search requirements, the design of a recovery plan, and training of employees.
        Working-time reductions can be either total or partial, depending on the size of the economic
    slowdown. In several countries, including Germany, STW involves fixed cost per worker for em-
    ployers (e.g., in terms of social security contributions to be paid independently of the number of
    hours worked). This reduces the incentive to use STW as a sort of subsidized furlough scheme,
    down to 100% hour reductions.
        A maximum duration of compensation prevails in all countries, notably because STW must be
    temporary by nature. In most countries, income falls progressively as hours fall further below their
    usual level. In a majority of countries, employers bear a share of the total cost of compensation for
    each reduced hour. This is a way to incentivize firms and employees not to abuse the system.

    2.1.2. The coverage of short-time work. In normal years the fraction of the labor force using
    STW is low in most OECD countries. This low coverage in normal years is associated with a
    low share of public expenditure, which is well below 1% of GDP in most countries. The take-up
    increases dramatically during recessions. From involving less (often much less) than 1% of the
    workforce in all OECD countries in 2018, by April 2020 these schemes involved about 20% of
    workers in the OECD area, with peaks of 50% in countries such as New Zealand.
        The dispersion of take-up rates across countries in normal years is clearly related to differences
    in STW schemes (Cahuc & Carcillo 2011, Hijzen & Venn 2011). The take-up is positively cor-
    related with the permissible reductions in weekly working hours that can be compensated, with
    the maximum duration of the scheme, and with the share of labor cost of hours reductions that is
    subsidized. Surprisingly, take-up rates do not appear to be related to such stringent requirements
    as the employers’ commitment to not dismiss employees for a certain period after the end of STW
    compensation, job search requirements, the design of a recovery plan, or the training of employ-
    ees. It might be that these conditions do not play an important role because their enforcement is
    difficult.
        STW schemes also tend to be more developed in countries with stricter employment protec-
    tion rules, as measured by the OECD employment protection indicator (Boeri & Bruecker 2011,
    Cahuc & Carcillo 2011, Hijzen & Venn 2011, Lydon et al. 2019). This positive relation between
    STW and job protection reflects a trade-off in regulations affecting internal (employment ad-
    justment within the firm) and external (ease of dismissals) flexibility. Countries that favor internal
    flexibility combine stringent employment protection regulations and generous STW, while exter-
    nal flexibility is associated with weak employment protection and no or very little STW use. At
    first sight, internal flexibility might seem preferable, insofar as it reduces job destruction during re-
    cessions, preventing inefficient layoffs. However, internal flexibility also has disadvantages. First,
    internal flexibility does not benefit all workers. It is clearly beneficial to workers in permanent
    jobs, but it can be detrimental to outsiders whose access to employment can be more difficult if
    STW reduces job turnover. This disadvantage is particularly relevant in strongly segmented labor
    markets. Second, STW may dampen the reallocation of workers toward more productive jobs, a
    consideration that is particularly important in the aftermath of the pandemic.

4   Boeri • Cahuc
2.1.3. Involvement of small business and liquidity constraints. As mentioned above, sev-
eral countries during the pandemic have considerably broadened entitlement conditions, enabling
more workers and firms to have access to STW. The major extension has been toward small busi-
nesses in the service sector. Unlike previous recessions that hit particularly hard large exporting
manufacturing plants, the pandemic has been very tough with small employers—for example, in
the retail trade, tourism, and entertainment sectors.
    This extension poses a number of problems to the design of STW. Traditionally STW oper-
ate as a sort of ex-post compensation to firms: Employers get the authorization to draw from the
STW fund based on a check of the entitlement conditions. Once the authorization is provided,
the employer advances the payments to the workers involved and gets a refund ex-post from so-
cial security. This mechanism allows firms to achieve maximum flexibility in carrying out hour
reductions. They do not have to pre-commit to involving a given number of workers in STW
and to a predefined structure of hour reduction; they will just report ex-post to the social security
administration the number of workers involved and the extent of the hour reduction.
    There are at least two problems in extending this design to small businesses. First, small em-
ployers are likely to be liquidity constrained and hence not in a position to anticipate the subsidy
to the workers. Second, controls from the social security administration are not possible when
reductions are declared only ex-post. This may increase moral hazard problems, as employers can
use STW as a wage subsidy without implementing any hour reduction. It is precisely to discourage
moral hazard that it can be desirable to introduce experience rating, that is, to force employers
making use of STW to pay higher contributions to the fund the more they draw from it. How-
ever, experience rating may make the scheme too costly for liquidity-constrained small employers
genuinely restructuring their activities if increases in contributions are not sufficiently postponed.

2.2. The Theory of Short-Time Work
The rationale for STW is that firms may dismiss workers inefficiently (from a social welfare per-
spective) when their revenue drops. From this perspective, it can be appropriate to use STW to
allow firms facing temporary drops in their activity to retain their employees. However, STW
may also induce inefficient reductions in hours worked and may prevent the reallocation of labor
toward more productive firms.

2.2.1. Reducing layoffs. The introduction of STW arrangements is often seen as a means to
avoid drastic layoffs (FitzRoy & Hart 1985, Burdett & Wright 1989). In the presence of fixed
costs per worker, savings on labor costs can be better achieved by acting on the extensive margin
(Boeri & van Ours 2021). However, layoffs generate large negative externalities, and employers
have limited incentives to take into account the social costs of their dismissal decisions. The fiscal
externalities of layoffs are numerous and sizeable: They include the unemployment benefits, the
social transfers paid to unemployed workers, and the drop in taxes and social contributions induced
by the removal of jobs. To these costs we may add the increase in health expenditure and the rise
in criminality induced by unemployment (Fougère et al. 2009).
    Experience-rating systems, whereby employers’ social contributions depend on the induced so-
cial costs of their firing decisions, can be used to reduce excess layoffs (Feldstein 1976, Blanchard
& Tirole 2007, Cahuc & Zylberberg 2008). These inefficient layoffs can be completely elimi-
nated when each firm fully covers the induced social cost of its firing decisions. However, there
are limits to experience rating. Notably, many firms may face financial constraints that prevent
them from keeping their employees. This is a particularly serious issue for small businesses. More-
over, evidence on employment adjustment during the Great Recession in the United States shows


                                                     www.annualreviews.org • Labor Market Insurance Policies   5
    that highly leveraged firms experienced larger employment losses in response to declines in local
    demand (Giroud & Mueller 2017). These highly leveraged firms were not less productive; nev-
    ertheless, their high leverage reduced their capacity to raise additional short- and long-term debt
    in response to a decline in local demand. As a consequence, they experienced more layoffs and
    were more likely to close down. In these circumstances, STW arrangements may not avoid in-
    efficient job destructions due to capital market imperfections (Burdett & Wright 1989, Braun &
    Bruegemann 2017).
        STW may also be an effective means to subsidize employment, compared to wage or hiring
    subsidies, because it can directly target firms with jobs at risk of being destroyed, and even the
    most fragile jobs within those firms. Other policies have no such possibility. Insofar as it is more
    profitable for firms to reduce the working hours of temporarily low-productive workers, STW
    induces firms to retain low-productivity jobs much more precisely than wage or hiring subsidies.
    Hence, STW can help sustain employment in recessions at a small cost relative to other policies
    providing financial support to firms (Cahuc et al. 2021, Giupponi et al. 2022).
        It has also been argued that STW is more equitable because it is a work-sharing scheme dis-
    tributing the adjustment burden over a large number of workers who reduce their hours of work
    rather than dismissing some workers outright (Abraham & Houseman 1994, Walsh et al. 1997,
    Vroman & Brusentsev 2009). This is particularly true when STW is implemented in the context
    of solidarity agreements aimed at preventing layoffs.

    2.2.2. Limits to short-time work. Although STW can be useful to avoid inefficient job
    destructions, it also has some disadvantages.
        First, STW distorts downward the number of hours worked per employee. Thus, STW may
    be used to reduce the hours of work of workers who would have not been dismissed in the absence
    of the STW, inducing inefficient reductions in hours worked. This can be particularly important
    if STW is strongly subsidized and hence there are strong incentives to use STW when the firm’s
    activity slows down. Firms facing seasonal activity fluctuation can frequently use STW (Cahuc &
    Nevoux 2017) benefiting from cross-subsidies that reduce aggregate production. To limit these
    cross-subsidies, it is desirable to rely on experience-rating systems, provided that these additional
    costs can be faced gradually by firms. Experience rating would then allow firms facing short-
    term financial constraints to sustain employment without inducing cross-subsidies that reduce
    aggregate production.
        Second, STW may dampen the reallocation of jobs. Inasmuch as STW causes fewer workers to
    be released into the unemployment pool from incumbent firms, new firms find it costlier to hire
    labor. In this context, STW may prevent labor from flowing toward the most productive firms
    and hence generate adverse effects on global production (Cooper et al. 2017).
        Third, as STW mostly benefits permanent workers, it may accentuate the labor market
    segmentation between stable and unstable jobs. The complementarity between STW and the
    stringency of employment protection legislation across OECD countries suggests that this phe-
    nomenon is potentially important. Indeed, empirical research finds that several STW schemes
    saved permanent jobs but had no effects on temporary jobs (Hijzen & Martin 2013, Giupponi
    et al. 2022).
        Fourth, problems in monitoring hour reductions may become more severe in the post-
    pandemic organization of work. The expansion of remote working, in particular, reduces the
    importance of statutory working hours and the observability of hours worked. In this context,
    there is a high risk that STW can be used as a wage subsidy benefiting firms that make the largest
    use of remote working.


6   Boeri • Cahuc
   All in all, the relative weight of the advantages and disadvantages of STW depends on the
behavior of workers and firms. This is an empirical issue that is covered in the next section.

2.3. The Empirics of Short-Time Work
Empirical evaluations of STW can be classified in two broad categories. The first category relies
on country-level or cross-sector-level data, while the second category relies on firm-level data.

2.3.1. Macroeconomic evaluations. Macroeconomic evaluations using cross-country data
(Abraham & Houseman 1994, Van Audenrode 1994, Boeri & Bruecker 2011, Cahuc & Carcillo
2011, Hijzen & Venn 2011, Hijzen & Martin 2013, Brey & Hertweck 2020) or cross-state data
in the United States (Abraham & Houseman 2014) have generally identified a positive impact of
STW on employment. Their conclusions are mostly drawn from a small number of observations,
limiting their ability to identify a causal relation between STW and employment.
    That being said, it has been found that STW did stabilize employment and reduced unemploy-
ment during the 2008−2009 recession (Boeri & Bruecker 2011, Cahuc & Carcillo 2011, Hijzen &
Venn 2011). Overall, these evaluations suggest that STW compensation programs had an impor-
tant impact on preserving permanent jobs during the economic downturn. The largest impacts
were in Germany and Japan, where 0.7−0.8% of jobs were saved.

2.3.2. Microeconomic evaluations. The first microeconomic evaluations mostly use firm-level
sources in Germany and France. In Germany, all analyses rely on the IAB Establishment Panel, an
annual survey with approximately 16,000 firms, representing 1% of all firms and 7% of all employ-
ees. Resulting estimates do not provide unambiguous results, mainly because of the inadequacy of
data to deal with the selection into STW.3 This literature runs regressions in which employment
growth is explained by STW use and by a set of control variables including the revenue growth of
the firm. To avoid bias induced by selection of firms with specific adjustment of employment into
STW, the prior experience of firms with the program is used to instrument STW. Using this ap-
proach, it is found that each employee on STW saved about 0.35 jobs during the Great Recession
in Germany, with a 95% confidence interval equal to [0.04, 0.70].4 However, this result should
be interpreted cautiously, since empirical evidence shows that firms that use STW tend to adjust
employment more strongly when output falls compared to firms that do not use STW (Bellmann
et al. 2015). This behavior of STW users may result from technical constraints: Firms have more
incentives to use STW if features of their production process imply that it is more costly to store
production or to find productive activities for incumbent employees when demand drops. At the
same time, several studies indicated that STW effectively selects firms hit by negative shocks as
measured by revenues or labor productivity (Giupponi & Landais 2018). Hence, instrumenting
program use with prior experience does not fully solve the selection issue and is likely to lead to
an underestimate of the potential positive impact of STW on employment. This may explain why
several contributions using this instrument found no positive effect on employment. Studies using
French data face a similar difficulty. Their results tend to show that establishments authorized to
use STW are more likely to go bankrupt.5


3 Boeri & Bruecker (2011), Balleer et al. (2016), and Tilly & Niedermayer (2016) find positive effects of STW

on employment. Bellmann & Gerner (2011), Kruppe & Scholz (2014), and Bellmann et al. (2015) find no
effects of STW on employment.
4 This is in line with the findings of Boeri & Bruecker (2011), who used the same identification strategy.
5 Calavrezo et al. (2010) rely on propensity score matching to deal with the selection issue.




                                                         www.annualreviews.org • Labor Market Insurance Policies   7
        More recent studies find positive employment effects of STW in France and in Italy. Cahuc
    et al. (2018, 2021) devise a causal identification strategy based on the geography of the program.
    They find that STW did save jobs in firms faced with large drops in their revenues during the
    Great Recession, in particular when highly leveraged, but only in these firms. The measured cost
    per saved job is shown to be very low relative to that of other employment policies, because STW
    targets jobs at risk of being destroyed. The identification of Giupponi & Landais (2018) relies on
    the interaction between two sources of variation in eligibility in Italy: sector and firm size. They
    find large and significant negative effects of STW on hours worked but large and positive effects
    on headcount employment. Contrary to the findings of Cahuc and colleagues, employment effects
    disappear when the program stops. Giupponi & Landais also identify the presence of significant
    negative reallocation effects of STW on employment growth of untreated firms in the same local
    labor market. Kopp & Siegenthaler (2021) use as control group firms that did not get the autho-
    rization to use STW in Switzerland during the Great Recession, and they find that the policy paid
    for itself.
        Christl et al. (2022) investigate the impact of the COVID-19 pandemic on German household
    income using a micro-level approach. They find the consequences of the crisis to be highly re-
    gressive, with a strong impact on the poorest households. However, this effect is nearly entirely
    offset by automatic stabilizers and discretionary policy measures. STW schemes, and especially
    the one-off payments for children, are effective in cushioning the income loss of the poor.
        All in all, empirical evidence indicates that STW can be effective at saving jobs in recessions.
    STW has the advantage of limiting the loss of specific human capital following the separation of
    employees from their firms. However, STW reduces the number of hours of work and limits the
    reallocation of workers to more productive jobs. The effectiveness of STW depends on the mag-
    nitude of each of these phenomena, which is currently insufficiently known empirically (Giupponi
    et al. 2022). In addition, the effectiveness of STW is highly dependent on employment protection
    regulations. In environments where wages are downward rigid and labor contract termination is
    long and costly, corporate downsizing during recessions can significantly increase business fail-
    ures. STW is then essential to dampen recessionary shocks. On the other hand, when adjustments
    at the extensive margin are less costly, as is the case in the United States, there may be a lower
    need to rely on STW for the survival of firms.


    3. PARTIAL UNEMPLOYMENT INSURANCE
    In a growing number of situations, and even more so after the rise of remote working inherited
    from the pandemic, the hours worked are less well defined, which reduces the scope of STW. At the
    same time, the rise in alternative work arrangements predating the COVID-19 crisis has blurred
    the line between employment and unemployment. Under these conditions, more and more people
    entitled to unemployment benefits are finding temporary jobs of very short duration. This means
    that many people are likely to enter and exit unemployment with high frequency. At the limit,
    unemployed persons may have paid work one day and an entitlement to the dole for the next day.
    Under these circumstances, what should be the entitlement conditions of an efficient insurance?
        To deal with this type of situation, many UI systems use partial unemployment benefits, which
    enable claimants to keep part of their unemployment benefits while earning low incomes (i.e.,
    lower than the unemployment benefits) from work. In several countries, the unemployment bene-
    fits that are not paid to the claimants while they are working create the right to extend the potential
    duration of unemployment benefits. Partial UI induces unemployed workers to accept part-time
    jobs, or jobs of short duration, that they might have had to refuse if the unemployment benefits
    eligibility rules required recipients to have zero labor earnings.


8   Boeri • Cahuc
3.1. The Design of Partial Unemployment Insurance in OECD Countries
Partial UI refers to benefits paid to persons working with occasional or part-time (henceforth
marginal) jobs who have lost a full-time job or an additional part-time one and are seeking a new
job in order to work more hours. This scheme is different from STW, which refers to benefits
compensating for the loss of wage or salary due to short-time working arrangements, and/or in-
termittent work schedules, in which the employer/employee relationship continues. Partial UI
exists in many European countries and in North America. It covered about 0.25% of the labor
force in OECD countries in 2019.6 Its design is very heterogeneous across countries.
    There is indeed a great diversity of rules concerning the relation between the current earnings
of individuals from short- or part-time employment and current unemployment benefits, the im-
plications of current partial unemployment benefits on future unemployment benefits entitlement,
and the duration of partial unemployment benefits.
3.1.1. Earnings and partial unemployment benefits. Two types of rules can be distinguished
concerning the relation between the earnings of unemployed workers from marginal jobs and
partial unemployment benefits.
    According to the first type of rules, recipients accepting marginal jobs can earn up to a specific
amount (e.g., 165 euros in Germany), called the “earning disregard,” without any reduction in
benefits during the reference period, which can be the week or the month. Above the disregard,
the current benefits are reduced in proportion to the labor earnings. Above this earning level,
then, the benefit-reduction rate can be very high, up to 100%, creating traps in short- or part-
time activities. There is a disregard of this kind in Australia, Austria, Belgium, Finland, Germany,
Luxembourg, New Zealand, the United Kingdom, and most US states (the exception being the
state of New York).
    According to the second type of rules, unemployment benefits are not discontinued once the
individual accepts a job offer but are reduced in proportion to all labor earnings, or hours or days
worked, during the reference period. However, there is not a 100% marginal effective tax rate at
work in these reductions, at least up to a given threshold. In other words, only a fraction of the
incomes earned are deducted from the unemployment benefits, maintaining some incentive to
accept marginal jobs. This means that the implicit effective tax rate is lower than 100%; per each
euro earned, there is not a one euro reduction in the level of the benefit. The threshold above
which the benefit-reduction is 100% is often defined at the level of the monthly or weekly wage
before the job displacement. Canada, France, Ireland, Italy, The Netherlands, Norway, Slovenia,
Switzerland, and the United States have schemes of this sort.

3.1.2. Implications for unemployment benefits entitlement. In some countries, the savings
on benefits that are not paid to claimants for periods in which they work are carried forward
and made available to these claimants at the end of the period of benefit entitlement. This is
the case in Canada, Finland, France, Israel, Norway, Poland, Sweden, and the United States. In
some countries (e.g., Finland, France) all unpaid benefits are carried forward. In other countries,
benefits are carried forward only for periods (weeks or months) in which the individual claimed
no benefits at all because they had enough work (e.g., Canada). In addition to lengthening the
potential duration of the current period of benefit entitlement, the income earned by part-time


6 This figure is drawn from the OECD data set on “Public expenditure and participant stocks on labour

market programmes” (see https://stats.oecd.org/index.aspx?DataSetCode=LMPEXP). It is obtained by
adding the partial unemployment benefits and the part-time unemployment benefits schemes as defined by
the OECD.


                                                     www.annualreviews.org • Labor Market Insurance Policies   9
     unemployed workers allows them to gain eligibility to new periods of benefit entitlement. This
     is the case in France, for instance, where every day of work while on claim lengthens the current
     period of benefit entitlement and generates one day of further benefit entitlement once the current
     period is exhausted, provided that at least 130 days (910 hours) have been worked over the last
     24 months.
         In other countries (e.g., Germany, Hungary, Portugal), unpaid benefits are not carried for-
     ward to the end of the period of benefit entitlement. However, the income earned by partial
     unemployment benefit recipients does allow them to get eligibility for new periods of benefit
     entitlement.

     3.1.3. Duration of part-time unemployment benefits. Partial UI could induce unemployed
     workers to remain in marginal jobs instead of striving to access full-time employment. In gen-
     eral, the duration of partial UI is limited by the potential duration of unemployment benefit
     entitlement. However, as discussed above, this potential duration can be extended by partial un-
     employment benefits if the benefits that are not paid to claimants for periods in which they work
     are carried forward to the end of the period of benefit entitlement or, even more so, if the income
     earned by partial unemployment benefit recipients allows them to start new periods of benefit
     entitlement.
        In order to reduce the possibility that individuals remain entitled to partial unemployment
     benefits for long periods, several systems limit their potential duration. For instance, in Denmark,
     the land where such “policy circles” of unemployment benefits were widespread back in the 1990s,
     the right to supplementary unemployment benefits is limited to 30 weeks within the last 104 weeks.

     3.2. The Theory of Partial Unemployment Insurance
     Partial unemployment benefits aim at making marginal jobs more attractive for unemployed job
     seekers, raising employment and production, and reducing the costs of UI. Nevertheless, partial
     UI can lock workers into marginal jobs, thereby reducing the total number of hours worked.

     3.2.1. The potential effects of part-time unemployment insurance. Partial UI encourages
     job seekers who are looking for stable full-time jobs to accept marginal jobs in the meantime.
         Accepting marginal jobs can have several advantages. These jobs can favor access to full-time
     and more stable jobs if employers use these short spells of employment to screen workers (Farber
     1999, Neugart & Storrie 2002, Houseman et al. 2003). Accessing marginal jobs can broaden the
     job search network and reduce human capital depletion of jobseekers. Finally, while working on
     marginal jobs, unemployed workers generally pay taxes and get lower unemployment benefits and
     social transfers, which improves public finances.
         Promoting marginal jobs may also have disadvantages. Many people who work on these jobs
     would like to get full-time and stable jobs. However, when partial UI provides income at levels
     close to those of stable and full-time jobs for relatively long periods, this may reduce the appeal
     of full-time and stable employment (Ek & Holmlund 2015). This has many negative effects. It
     raises income uncertainty, it reduces the incentives to invest in human capital, it worsens career
     prospects and long-term earning opportunities, it reduces the ability to obtain credit, it makes
     childcare arrangements more complicated, and it degrades the state of public finances.

     3.2.2. The optimal design of partial unemployment insurance. Economic analysis provides
     limited guidance when it comes to the optimal design of partial UI. The canonical analysis of
     optimal UI overlooks the choice of the number of hours of work and the possibility of partial
     unemployment benefits (Baily 1978, Chetty 2006). It assumes that individuals can be in only two
     states, either full-time unemployed or full-time employed. In this framework, the optimal level of

10   Boeri • Cahuc
unemployment benefits increases with risk aversion and decreases with the elasticity of unemploy-
ment duration with respect to unemployment benefits. Introducing partial UI in this framework
is not an easy task. One needs to account for labor supply at the extensive margin (working or not
working) and at the intensive margin (choice of the number of hours worked conditional on work-
ing) in a dynamic and stochastic context. This type of problem has been studied by the literature
on optimal taxation and optimal insurance. This literature shows that it is essential to coordinate
the tax system with UI. It suggests that the optimal level of partial unemployment benefits should
depend on the intertemporal elasticity of labor supply and on labor market frictions that limit the
adjustment of hours worked (Farhi & Werning 2013, Werquin 2016). Beyond these results, no
simple conclusion providing clear guidance to designing optimal partial UI has emerged so far.
Much remains to be done on this issue.
    From this perspective, the contribution of Le Barbanchon (2016), focusing on partial UI in the
United States, is particularly interesting. In the systems analyzed by Le Barbanchon, insurance re-
cipients accepting part-time jobs can earn up to the disregard with no reduction in benefits. For
every dollar earned above the disregard, current benefits are reduced on a dollar-per-dollar ba-
sis: The static marginal benefit-reduction rate is 100%. However, the reduction in benefits is not
lost; it can be paid in a later week. The corresponding benefit transfer delays the potential ben-
efit exhaustion date. Accordingly, forward-looking recipients make decisions based on a dynamic
marginal tax rate, which is lower than the static benefit-reduction rate. Le Barbanchon analyzes the
consequences of changes in the benefit-reduction rate. He finds that setting the benefit-reduction
rate at 80% instead of 100% would be welfare improving. Moreover, he shows that the optimal
benefit-reduction rate should vary over the unemployment spell and should depend on the arrival
rate of job offers.

3.3. The Empirics of Partial Unemployment Insurance
The main issue addressed by the empirical literature is the impact of partial unemployment ben-
efits on access to nonregular and regular employment. This literature faces important difficulties
when it comes to causal effects, insofar as nonobservable characteristics of workers involved in
partial UI are likely correlated with the possibilities individuals have to access regular jobs. In
particular, it may be that people with identical observable characteristics who access marginal
jobs more easily also have easier access to full-time and stable jobs. Therefore, if it turns out
that recipients of partial unemployment benefits do find stable and full-time jobs faster than full-
time unemployed workers, this does not mean that partial unemployment benefits per se foster
accession to stable and full-time employment. The empirical literature has developed different
strategies to deal with this issue.
3.3.1. Natural experiments. The seminal contribution of McCall (1996) exploits variations in
the design of partial unemployment benefits across US states from 1986 to 1992. In most US
states, UI recipients accepting part-time jobs can earn income up to the level of the disregard,
with no reduction in benefits. Above the disregard, current benefits are generally reduced on a
dollar-per-dollar basis. The disregard varies across states and within states over time. A 10% in-
crease in the disregard is estimated to raise the probability of part-time reemployment for UI
recipients from 3.9% to 5.7% in the first three months of unemployment. Moreover, a 10% in-
crease in the disregard is found to reduce expected joblessness durations within a range varying
from 0.3% to 0.9%. McCall (1996) finds that the effects of partial unemployment benefits are het-
erogeneous across demographic groups. An increase in the disregard is found to significantly raise
the probability of part-time reemployment for blue-collar youth during the first three months of
joblessness. However, no significant impact on the reemployment behavior of white-collar youth
is detected.
                                                    www.annualreviews.org • Labor Market Insurance Policies   11
        Le Barbanchon (2016), relying on a similar identification strategy with US data, estimates that
     partial unemployment benefits do increase labor supply. An additional factor operating in this
     direction is the possibility to carry forward benefits (Le Barbanchon 2021).
        AitBihiOuali et al. (2017) draw on a reform that in France reduced by 20% the threshold
     number of hours below which persons are entitled to the disregard. Exits to jobs with hours just
     below the threshold increased after the reform. The elasticity of hours with respect to the earnings
     from partial UI is about 0.14.
     3.3.2. Timing of events. Several studies rely on a timing-of-events approach (Abbring & Van
     den Berg 2003) to disentangle causal from selection effects of flows into partial unemployment.
     This approach compares the behaviors of groups of individuals who differ in the timing of the
     transition from full-time unemployment to partial unemployment, assuming that this timing is
     random during their unemployment spell. In this setup, individuals who take up partial unem-
     ployment benefits earlier in their unemployment spell belong to the treatment group, which is
     compared to the (control) group of individuals who take up these benefits later in their unem-
     ployment spell. Note, however, that this approach makes it possible to identify the effects that
     working in marginal jobs while on claim has on exits from unemployment, but it does not make
     it possible to identify the effects of the partial unemployment benefits per se, since the search
     behavior of individuals who did not start working while on claim may be influenced by the partial
     unemployment benefits.
         Relying on this approach, Kyyrä (2010) found that starting work while on claim speeds up the
     access to regular employment in Finland. This effect is large and significant: When the applicant
     takes up a short full-time job that qualifies for partial unemployment benefits, the hazard rate of
     moving to regular employment increases almost by one-half.
         Kyyrä et al. (2013) highlight the importance of the design of partial UI in Denmark. Receiving
     partial unemployment benefits and working part-time reduce unemployment durations on aver-
     age. However, the sign and magnitude of the impact of starting work while on claim vary with
     individual characteristics and with the timing and length of the partial unemployment benefit pe-
     riod. Longer spells of partial UI tend to prolong unemployment duration, in particular for married
     women, white-collar workers, and manufacturing workers. The effects are much less detrimental
     for young workers and immigrants with short supplementary benefit periods.
         Starting work while on claim is also estimated by Cockx et al. (2013) to foster access to regular
     employment for young women in Belgium. The survivor rate in unemployment of partially un-
     employed workers is reduced by 27 percentage points one year after the start of receipt of partial
     unemployment benefits, compared to that of full-time unemployed workers.7
         Gerfin et al. (2005) found that starting work while on claim exerts a positive impact on entries
     into regular employment in Switzerland.8 The chances that participants in partial unemployment
     benefits programs will get a regular job 15 months after starting work while on claim are about
     7–9 percentage points better than those of nonparticipants. The effects are heterogeneous across
     workers. Starting work while on claim is ineffective for unemployed persons who can find jobs
     easily anyway or who are having a short unemployment spell.


     7 Contrary to the finding of Kyyrä et al. (2013) described above, Cockx et al. (2013) do not find that the spell

     of unemployment benefits affects the transition to regular employment. These results should be interpreted
     with caution, since many transitions are missing in the data of Cockx and colleagues.
     8 Gerfin et al. (2005) analyze the impact of partial unemployment benefits on the chance of getting a job of

     duration of at least three months with earnings of at least 90% of those in the previous job.



12   Boeri • Cahuc
   In France, Fremigacci & Terracol (2013) find a lock-in effect of starting work while on claim
when individuals are eligible for partial unemployment benefits and an increased transition rate to
regular jobs once unemployed workers are no longer eligible. These effects are significantly less
important for low-skilled and low-experience unemployed workers, who face greater difficulties
in finding jobs. This suggests that partial UI can create incentives to remain longer in partial
unemployment and then seek regular jobs once the opportunity to get partial unemployment
benefits is exhausted.
3.3.3. Controlled experiments. O’Leary (1997) and Lee et al. (2021) analyze the consequences
of the Washington State Unemployment Insurance Earnings Deduction Experiment, in which
for one year, starting in October 1994, the state of Washington conducted a large randomized
experiment to investigate the effects of reducing the amount of benefits deducted from claimants
who worked while on claim. They find that the tax reduction had no positive effects on labor
supply and increased the UI expenditure because it raised the propensity to claim benefits. They
conclude that increasing the weekly benefit is more efficient than reducing the tax.
    Cahuc et al. (2021) and Altmann et al. (2022) ran large randomized controlled experiments
in France and Denmark. They took advantage of the lack of knowledge of job seekers regarding
partial UI and provided information about this scheme. In both cases, the information provision
had a significant positive impact on the propensity to work while on claim but reduced the unem-
ployment exit rate, showing important lock-in effects into unemployment associated with partial
unemployment benefits.
    All in all, the empirical literature points to the fact that the adaptation of UI to the development
of new forms of employment has to be undertaken cautiously. To limit the substitution of marginal
employment for regular employment, the contributions from marginal jobs should balance the
partial benefits. Several countries have introduced voluntary schemes for marginal workers to
avoid raising contributions for nonstandard workers (OECD 2018). However, the take-up of these
voluntary schemes is low and suffers adverse selection issues, insofar as workers with the highest
risks of unemployment have more incentives to participate. From this perspective, it is desirable to
adjust the eligibility conditions for each type of worker to ensure that their contributions balance
their benefits—for instance, by offering a menu of insurance contracts (Barnichon & Zylberberg
2022). This framework presents the advantage to deal with the selection issue and to facilitate
transitions between standard and nonstandard employment. It is also important to counsel and
monitor partially unemployed workers to help them in finding full-time jobs.

4. WAGE INSURANCE
WI programs, which provide a temporary wage supplement that partially reduces the wage loss
experienced by newly reemployed workers, also aim at inducing unemployed workers to accept
low-paid jobs. WI differs from partial UI because individuals are no longer recipients of unem-
ployment benefits once they have been reemployed in WI programs. In practice, WI is generally
targeted at permanently long-tenured workers who find themselves displaced. For instance, in
2016, President Obama proposed WI as a program for helping all dislocated workers as they re-
covered from the permanent loss of a job. He argued that if a “hardworking American loses his
job—we shouldn’t just make sure that he can get UI; we should make sure that program encour-
ages him to retrain for a business that’s ready to hire him. If that new job doesn’t pay as much,
there should be a system of WI in place so that he can still pay his bills.”9


9 Barack Obama, State of the Union Address, January 12, 2016, quoted by Wandner (2016).



                                                      www.annualreviews.org • Labor Market Insurance Policies   13
         The case for WI is motivated by the large-scale reallocation that may follow the pandemic
     (Barrero et al. 2021), notably in the case in which the most affected sectors (leisure and hospitality
     to start with) should not rapidly recover from the crisis (Basso et al. 2022). It is also motivated by
     the large wage losses experienced by long-tenured displaced workers when they find a new job
     (Chan & Stevens 1999), and by the fact that some new job opportunities related to the conse-
     quences of the health crisis at the low end of the skill distribution (e.g., disinfection-related jobs)
     are relatively low paid and exposed to a high epidemiological risk.

     4.1. Wage Insurance Regulations
     WI provides partial replacement of lost wages to displaced workers who accept pay cuts. WI ben-
     efits are temporary and are reserved for workers who face wage losses when they change jobs.
     Unlike partial UI, WI provides compensation not only for marginal jobs but also for full-time
     and stable jobs if the remuneration of the new job is lower than that of the previous job.
         As shown above, partial UI exists in many countries. A large set of countries also use permanent
     in-work benefits to incentivize unemployed workers to accept low-paid jobs. Time-limited in-
     work benefits are scarcer (Van der Linden 2021). Most of them are targeted at unemployed welfare
     recipients. WI schemes are even more scarce.10 Their size is generally very small, and they can be
     part of programs that include other components, especially job search assistance and training.
         US Trade Adjustment Assistance (TAA) is a federal transfer program established under the
     1962 Trade Expansion Act that provides assistance to workers permanently separated from their
     jobs due to international trade. The program aimed at coupling trade liberalization with insurance
     for adversely affected workers. TAA contains several program components. It provides benefits up
     to $10,000 for workers enrolled in training programs, up to a maximum of three years. Recipi-
     ents are also entitled to extended UI benefits while training. In the interest of promoting rapid
     reemployment, and because training may not pay off for older workers, the Trade Act of 2002
     established a WI program called the Alternative Trade Adjustment Assistance (ATAA) for older
     workers. TAA-certified workers aged 50 or older can get ATAA wage subsidies if they obtain full-
     time jobs that pay no more than $50,000, earn less than they did in their prior jobs, and find
     employment within 26 weeks of becoming unemployed. The subsidy is equal to 50% of the wage
     drop for up to two years. It is capped at $10,000. The ATAA program is small: Yearly inflows into
     the scheme are of fewer than 100,000 workers.11
         In Japan, the Employment Continuation Benefits for Older Workers program compensates
     workers from age 60 to 65 whose wage drops by at least 25%. The compensation goes up to 15%
     of their current wage until they reach age 65. This program is limited in size. About 190,000
     workers were enrolled in 2012 (OECD 2015, p. 120).
         In Germany, the Remuneration for Older Workers program12 introduced in 2003 was tar-
     geted at workers aged above 50. Workers finding a new job paying less than their previous jobs
     were eligible for a compensation of 50% of the earnings drop in the first year and 30% in the


     10 Information is gathered from labor market researchers in Austria, Belgium, Denmark, France, Germany,

     Italy, The Netherlands, Portugal, Spain, Sweden, Switzerland, and the United Kingdom and from the OECD
     publication series “Back to work,” which identifies wage insurance programs in Canada and in the United
     States only, among nine countries: Australia, Canada, Denmark, Finland, Japan, Korea, New Zealand, Sweden,
     and the United States.
     11 Schochet et al. (2012) and Wandner (2016) provide extensive surveys of wage insurance in the United States.
     12 The program’s name was Entgeltsicherung für ältere Arbeitnehmer (see Steiner 2017, van den Berg et al.

     2017).



14   Boeri • Cahuc
second year. The compensation was proportional to the number of hours worked. For instance, if
40 hours per week were worked on the previous job and 20 were worked in the new job, the earn-
ings difference was computed using half of the previous earnings. The program was limited in
size. It had less than 10,000 participants until 2006 and about 20,000 when it was cancelled in
2011.
    In France, since 2011, companies with fewer than 1,000 employees and companies of all
sizes engaged in reorganization or liquidation proceedings that dismiss employees for economic
reasons must offer them the option of joining the Job Security Contract13 program. This program
sets them on a return-to-work path including support for the professional goals of the individual
as well as training and work periods. Workers finding a new job paying less than their previous
jobs are eligible to have their drop in earnings fully offset for a period that may not exceed
12 months, and within a maximum amount of up to 50% of their residual rights to UI benefits.
Unlike the US, Japanese, and German WI programs, the French job security contract is not
reserved for the elderly. Nevertheless, its size remains small. About 80,000 workers were enrolled
in 2016, and most of them were involved in training programs.
    The Earnings Supplement Project implemented in Canada in 1995–1998 was a demonstration
project run in Manitoba, Ontario and in Quebec aimed at testing the effects of a financial incentive
designed to stimulate the reemployment of displaced workers and repeat users of UI (Bloom et al.
1999). The program bridged 75% of the earnings loss for up to two years for workers working at
least 32 hours per week within 26 weeks of the offer date.

4.2. The Theory of Wage Insurance
WI aims to compensate displaced workers for wage losses with a temporary subsidy. It has pros
and cons. Its proponents argue that it improves labor market equity for workers adversely affected
by economic restructuring. They also argue that WI would reduce the periods of unemployment
and increase employment and earnings. Its opponents question its equity and raise concerns about
its negative impact on the career prospects of WI recipients.
4.2.1. Equitable sharing of the gains from jobs reallocation. A substantial body of empirical
contributions has shown that long-tenured displaced workers face significant and persistent prob-
lems, including unemployment, earning losses, and health problems, which affect not only them
but also their children (Oreopoulos et al. 2008, Bertheau et al. 2022). WI can help in solving these
problems insofar as it compensates individuals affected by significant persistent negative shocks.
By smoothing the social costs of job reallocation, WI can help improve the level of public support
for international trade and, more widely, public acceptance of technological changes. This idea
was an important motivation for the implementation of WI in the United States at a time of great
fear about the adverse impact of international trade on American jobs (LaLonde 2007, Wandner
2016).
    Although it is obvious that WI can compensate long-tenured displaced workers, the question
is whether these long-tenured workers should benefit from special treatment. Empirical studies
show that cross-worker wage differentials are explained by characteristics of workers and firms.
The importance of labor market frictions implies that the firm fixed effects explain a significant
share of the wage distribution, meaning that workers identically motivated and productive can
be paid very differently (Abowd et al. 2018, Song et al. 2019). In this context, lucky workers
are matched with successful firms, in which they can win long and satisfying career paths. Less


13 The program’s name is Contrat de sécurisation professionnelle (see Boum Galiana et al. 2016).



                                                        www.annualreviews.org • Labor Market Insurance Policies   15
     lucky workers find jobs in less successful firms. These jobs offer lower wages and are less sta-
     ble. From this perspective, compensation for the wage losses of long-tenured displaced workers
     may do no more than help to reproduce and prolong the inequality between those workers who
     have been lucky at the start of their career and those who have been less lucky. Designing an
     equitable insurance system requires precise information about the process that governs wage dy-
     namics over the life cycle of all workers and not just those who lose their job after a long career
     in the same firm. In the current state of knowledge, there is no strong argument on grounds of
     equity in favor of compensating long-tenured workers specifically for wage losses. Given that job
     loss for older workers is a one-way street (Boeri & van Ours 2021), a case could be possibly made
     for targeting WI to displaced workers on the basis of their age until they reach the pensionable
     age.
         A related issue concerns the definition of the conditions under which WI could be provided.
     For instance, in the United States, only earning losses related to international trade are offset,
     while those induced by technological shocks are not. This creates differences of treatment that are
     also difficult to justify on equity grounds. The only justification may be a political one: Workers
     appear to oppose more trade-related labor market adjustments than restructuring associated to
     technological change (Di Tella & Rodrik 2020).

     4.2.2. Incentives for reemployment. An important argument in favor of WI is that it provides
     incentives for finding jobs. The literature on optimal UI does suggest that in-work benefits can
     be desirable (Hopenhayn & Nicolini 1997, 2009) because they supply incentives to look for and
     to accept job offers. The use of in-work benefits may allow the UI system to set more generous
     benefits over longer spells in optimal fashion and to improve the welfare of workers.
        However, in the real world, the design of in-work benefits in UI systems has to depend on
     many parameters, which implies that they are difficult to implement. In particular, optimal in-
     work benefits should be temporary to avoid excessive costs and lock-in effects in subsidized low-
     productivity jobs. However, if in-work benefits are temporary, workers may have incentives to go
     back to unemployment once they stop getting them. From this perspective, time-limited in-work
     benefits are fully justified if they do function as stepping stones toward stable employment. We
     will see that empirical evidence provides very little support for this assumption. For these reasons,
     in-work benefits are seldom used in UI systems, and there is no reason to assess the situation of
     recipients of WI differently from that of other unemployed workers. This means that there are
     no strong arguments justifying WI in terms of its positive impact on reemployment.

     4.2.3. Job quality and career prospects. WI can induce workers to accept low-quality jobs and
     to remain in these jobs as long as they are getting compensated for their wage loss. Hence, WI can
     create disincentives to building human capital and looking for better jobs. This is detrimental to
     the career path of WI recipients and to the overall efficiency of the labor market (Michau 2021).
     However, these disadvantages may be mitigated by monitoring and training programs provided to
     WI recipients. Actually, there are complementarities between financial incentives to finding jobs
     on one hand and training and monitoring programs on the other. In any case, this suggests that WI
     should not be isolated from other active labor market policies. The French Job Security Contract
     program, which includes training, job search counseling and monitoring, and compensation for
     earnings drops, relies on such premises.
         By reducing uncertainty in the returns on investment in human capital, WI can also have direct
     positive effects on human capital accumulation. If access to potentially long-tenured jobs requires
     employees to make important investments in specific human capital that cannot be valorized in
     other jobs, there can be room for WI for long-tenured displaced workers. However, insofar as

16   Boeri • Cahuc
employees have limited incentives to invest in specific human capital (Becker 1964, Acemoglu &
Pischke 1999), the impact of WI in this area is likely to be limited.
   All in all, the most solid justification of WI relies on its potential positive impact on the reem-
ployment prospects of older displaced workers. Determining whether compensation for the wage
losses of these workers does in fact yield strong incentives to finding jobs is an empirical issue
taken up in the next section.

4.3. The Empirics of Wage Insurance
The scarcity of WI programs entails that very few evaluations are available.14 Nevertheless, they
confirm the evaluations of work-related benefit programs, and in particular time-limited work-
related benefit programs, which show that they have an impact on employment and earnings that
disappears when work-related benefits are no longer paid.
4.3.1. Evaluations of time-limited in-work benefits programs. Several empirical studies
have shown that time-limited in-work benefits can promote employment among low-wage work-
ers. Four trials in Canada and in the United States have randomly assigned people either to a
program group that was eligible for earnings supplements or to a control group that was not. Their
findings are consistent (Michalopoulos 2005, Card & Hyslop 2009). These programs all increased
employment, earnings, and income. However, their effects diminished over time. The effects on
employment and earnings were larger and more persistent for long-term welfare recipients with
limited education and work experience. The combination of time-limited earnings supplements
with employment-related services aimed at helping those eligible to find and keep jobs has ef-
fects that exceed those from earnings supplements alone (Robins et al. 2008). Evidence from an
experimental program for unemployed welfare recipients in the United Kingdom is in line with
these findings (Dorsett 2014); the study found that time-limited in-work benefits combined with
post-employment services raised employment. Furthermore, positive but nonsignificant effects
on employment retention are observed. These results suggest that time-limited in-work benefits
have temporary positive employment effects, which vanish when the benefits stop being paid.

4.3.2. Evaluations of wage insurance programs. The Canadian Earnings Supplement Project
involved an experimental design (Bloom et al. 1999). Treated workers were offered payments of
75% of their earnings loss for up to two years if they became employed in a nearly full-time job
(32 hours per week) within 26 weeks of the offer date. The program was tested on two groups
comprising a total of 5,912 individuals in 1995 and 1996. The program had a small positive and
short-lived impact on reemployment and negative effects on wages. Almost 50% of treated work-
ers remained in the scheme for the full two years. The program had almost no effect on the amount
or duration of unemployment benefits.
    The effects of the WI program for older workers in place in Germany during the period
2003–2011 have been evaluated by a field experiment involving an information treatment sending
information about the program to 2,328 eligible persons. This treatment is used as an instrument
to estimate the effects of the program. Receipt of this information increased the share of individ-
uals informed about the program by around 20 percentage points. A survey shows that more than
70% of workers thought that this program was suited to bring older unemployed individuals back
into jobs. Only around 20% answered that in-work benefits stigmatized workers, and around 66%
that they were preferable to wage subsidies to employers. Nevertheless, the employment impact of


14 Schochet et al. (2012) and Hyman (2018) evaluate the impact of TAA in the United States, but their

evaluations are not focused on the wage insurance component of this scheme.


                                                       www.annualreviews.org • Labor Market Insurance Policies   17
     in-work benefits was mixed. For workers aged 50–54 and 60–64, receiving the information had no
     significant effect on employment. There was a small positive impact on employment of individuals
     aged 55–59. Moreover, there were small negative effects on the earnings of those aged 50–54 (Van
     den Berg et al. 2017).
         Hyman et al. (2021) evaluate the impact of the US TAA program, which included a WI pro-
     gram available to workers aged 50 and over who were laid off in a trade-related displacement.
     They compare the employment and earnings trajectories of workers exceeding this age threshold
     with those of slightly younger workers. They find that WI-eligible workers are more likely to be
     employed in the years just after displacement and that their earnings are higher during this period,
     but this difference is entirely accounted for by the higher probability of employment. The gaps in
     employment probability and earnings progressively fade away and cancel out after five years.
         All in all, current evaluations do not provide much support for the effectiveness of WI to boost
     employment. The employment impact of time-limited in-work benefits seems to be smaller for
     displaced workers than for welfare recipients, perhaps because they have higher reservation wages
     and need time to revise their expectations about career prospects. It is possible that combining WI
     with counseling and employment-related services could make WI more effective. Much research
     is needed before convincing lessons can be drawn in this realm.

     5. CONCLUDING REMARKS
     Partial UI, STW, and WI have been tried at different scales in several countries and evaluated,
     to a lesser extent, by economists and social scientists. From our survey of these experiments and
     evaluations, we can draw the following lessons.
         First, partial UI, which exists in many countries, must indeed play a key and increasing role
     to support the development of new forms of employment. However, the adaptation of UI to the
     development of new forms of employment that are more unstable and more often part-time has to
     be undertaken cautiously. To limit the substitution of nonregular employment for regular employ-
     ment, the contributions of nonstandard workers should balance the benefits they receive. From
     this perspective, it is desirable to adjust the mandatory requirements and eligibility conditions for
     standard and nonstandard workers to ensure that their contributions balance their benefits. This
     framework presents the advantage to deal with selection issues and to facilitate transitions between
     standard and nonstandard employment.
         Second, due to capital market imperfections, STW can be effective at saving jobs in recessions,
     as it can avoid inefficient job destructions. In any case, it is clear that the scope of STW should be
     confined to firms facing genuine difficulties as well as time limited in order to avoid reducing hours
     worked excessively and dampening the reallocation of jobs toward productive firms. It should also
     be experience rated in order to prevent abusive and repeated use.
         Third, to date the rare evaluations we have of the scarce WI systems that do exist provide
     little support for the two arguments advanced by the proponents of wage insurance in terms of
     protection of long-tenured workers. Targeting WI on this basis risks benefiting the insiders to the
     detriment of outsiders. Moreover, empirical evidence suggests that time-limited in-work benefits
     provided by WI systems have little incentive effects for individuals to find and keep regular jobs. A
     case could be possibly made for targeting WI to older workers displaced from their previous jobs.

     DISCLOSURE STATEMENT
     The authors are not aware of any affiliations, memberships, funding, or financial holdings that
     might be perceived as affecting the objectivity of this review.


18   Boeri • Cahuc
ACKNOWLEDGMENTS
We thank Giulia Giupponi for very useful comments.

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