Does Extending Unemployment Benefits Encourage Long-Term Unemployment?

Korea Labor Institute Analyzes Employment Effects of Unemployment Benefit Reform
Longer Unemployment Periods for Young People Without Improvement in Job Quality

The extension of the unemployment benefit payment period (designated benefit days) has resulted in longer periods of unemployment, but only a minority of recipients were able to secure better jobs upon reemployment.

On October 7, Yonhap News Agency reported, citing a report titled "Analysis of the Employment Effects of the Unemployment Benefit System" released by the Korea Labor Institute, that the policy reform in October 2019, which extended the payment period for job-seeking benefits, had an impact on both the duration of unemployment and the broader labor market.

Yonhap News Agency

At the time of the reform, the payment period for job-seeking benefits was increased from 90-240 days to 120-270 days, and the age categories were simplified from three groups (under 30, 30-50, and over 50) to two groups (under 50 and 50 or older).

According to the report, the average benefit period for all recipients increased by about 30 days after the reform. The period required to find new employment also increased by around 17 days, although this increase was smaller than that observed during the probationary period. The research team explained, "This is due to the inclusion in the statistics of job seekers who originally experienced longer periods of unemployment."

The reemployment rate within the payment period was approximately 4.8 percentage points lower than before the reform, and even 18 months after applying for unemployment benefits, the rate remained 1.9 percentage points lower than before the policy change.

By age group, there was little change among those under 30, but the reemployment rate fell by 1.3 percentage points for those aged 30 to under 50, and by 3.3 percentage points for those 50 and older. The research team analyzed, "It appears that the extension of the payment period has led to an increase in long-term unemployment."

Examining changes in job quality based on the wage levels of reemployed individuals, there was no improvement for those under 30, but wages increased by 2.9% for those aged 30 to under 50, by 3.3% for those 50 and older, and by about 4% on average overall. By gender, men under 30 saw no wage improvement, while those in higher age groups experienced wage increases. Among women, only those aged 30 to under 50 saw a wage increase of about 1.8%.

The report stated, "The improvement in the quality of reemployment among certain age groups can be seen as a positive effect, as unemployment benefits alleviate liquidity constraints for job seekers and help address market failures." However, it also pointed out the possibility of moral hazard among young people under 30, as their unemployment periods lengthened without any improvement in job quality.