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                          IZA DP No. 492

                          Benefit Entitlement and Unemployment
                          Duration: The Role of Policy Endogeneity
                          Rafael Lalive
                          Josef Zweimüller

                          May 2002

                                                                     zur Zukunft der Arbeit
                                                                     Institute for the Study
                                                                     of Labor
Benefit Entitlement and Unemployment
     Duration: The Role of Policy

                                     Rafael Lalive
                         University of Zurich, CESifo, and IZA Bonn

                                  Josef Zweimüller
                        University of Zurich, CESifo, CEPR, and IZA Bonn

                              Discussion Paper No. 492
                                     May 2002


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IZA Discussion Paper No. 492
May 2002


         Benefit Entitlement and Unemployment Duration:
                 The Role of Policy Endogeneity *
The potential duration of benefits is generally viewed as an important determinant of
unemployment duration. This paper evaluates a unique policy change that prolonged
entitlement to regular unemployment benefits from 30 weeks to a maximum of 209 weeks for
elderly individuals in certain regions of Austria. In the evaluation, we explicitly account for the
fact that the program was an endogenous policy response to a crisis affecting individuals with
severe labor market problems. The main results are: (i) REBP reduced the transition rate to
jobs by 17 %; (ii) accounting for endogenous policy adoption is important and quantitatively

JEL Classification:    C41, J64, J65

Keywords:      quasi-experiments, policy endogeneity, benefit entitlement, maximum benefit
               duration, unemployment duration, unemployment insurance

Josef Zweimüller
IEW, University of Zurich
Bluemlisalpstrasse 10
CH-8006 Zurich
Tel.: +41 1 634 3724
Fax: +41 1 634 4907

  We are indebted to Jonas Agell, Jim Albrecht, Lorenz Götte, Bertil Holmlund, Brigitte Humer, Georg
Kirchsteiger, Francis Kramarz, Michael Lechner, Patrick Puhani, Gerard van den Berg, Jan C. van
Ours, Rudolf Winter-Ebmer, and participants of workshops at CEPR, CESifo, Tinbergen Institute, and
research seminars at Basel, Geneva, Heidelberg, Oslo, Vienna, and Zurich for valuable comments.
We thank Christoph Clavadetscher, Andreas Kuhn, and Florian Stahl for superb research assistance
and Maria Hermann for checking the manuscript. Financial support by the Austrian National Bank is
gratefully acknowledged.
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                                                         Wdeoh 5

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                                                Wdeoh 6

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                                               Iljxuh 5

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                                                Wdeoh 7

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              Table 1: Unemployment rate and long-term unemployment
         in treated and control regions in the year before REBP was enacted

                               Unemployment                    Percentage of
                                   rate                    long-term unemployed

 A. Treated regions
          age 45-49                   3.6                           15.7
          age 50-59                   4.0                           22.3
 B. Control regions
          age 45-49                   4.0                           17.4
          age 50-59                   4.9                           23.4

Notes:  Treated region = region with entitlement to REBP. Long-term
        unemployment = spell lasts longer than 12 months.
Source: Own calculations, based on Austrian Social Security data.
                        Table 2: Unemployment spell characteristics:
                             Steel workers vs non-steel workers

                                      All spells       Treated spells        Non-treated spells

Mean completed duration (days)
       Steel workers                   219.92             490.14                  146.05
       Non-steel workers               110.32             200.39                  105.58

Exit to employment (share of total)
         Steel workers                  .657               .350                    .753
         Non-steel workers              .851               .740                    .857

         Steel workers                 31205                7431                   23774
         Non-steel workers             280871              14479                  266392

Notes: Steel workers: individuals formerly employed in the steel industry.
Source: Own calculations, based on Austrian Social Security data.
                     Table 3: Aggregate statistics, by type of treated region

                                                   TR1                  TR2                 CR

                                              In pre-reform       In pre- and post-
Entitled to REBP                                                                           Never
                                                  period           reform period

Percentage employment in steel industry             8.9                 19.2                4.8

Percentage votes forb)
          Social democrats (SPÖ)                   38.5                 47.8               41.1
          Conservatives (ÖVP)                      49.6                 38.4               43.3

Head of ÖVP
         In pre-program period                  from TR1
         In pre-reform period                                        from TR2
         In post-reform period                                                            from CR

Notes:    Pre-program period ends in May 1988; pre-reform period: June 1988 until December
          1991; post-reform period: January 1992 until July 1993; post-program period starts
          August 1993.
          a) The year before REBP was enacted, average.
          b) In 1986 elections for the parliament.
Source:   Own calculations, based on Austrian Social Security data; Statistics Austria.
     Table 4: Labor market conditions in treated regions and control regions 1981-1998
                                    Regression results

Dependent variable        Employment             Job destruction          Job creation
                         (1)        (2)           (3)        (4)         (5)        (6)

TR1* year (88-91)       -.0007       -.0014     -.0009     -.0019       -.0017     -.0033
                       (.0075)      (.0080)    (.0074)     (.0071)     (.0024)    (.0048)

TR2* year (88-93)      -.0065       -.0079**   .0074**      .0056       .0008      -.0023
                        (.0032)      (.0039)   (.0032)     (.0035)     (.0031)    (.0034)

TR1* year (86-95)                    .0011                  .0017                  .0028
                                    (.0067)                (.0060)                (.0057)

TR2* year (86-95)                    .0020                  .0027                  .0047
                                    (.0037)                (.0033)                (.0032)

TR1* year(81-98)       .0078**                 -.0090 **                -.0012
                       (.0095)                  (.0035)                (.0033)

TR2* year(81-98)        -.0020                 -.0044 **             -.0064 ***
                       (.0019)                  (.0022)                (.0018)

Year effects             yes          yes        yes        yes         yes         yes
Region fixed effects     no           yes        no         yes         no          yes

N (obs.)                2178         2178       2178       2178         2178       2178
 2                      0.145        0.278      0.056      0.361         0.1       0.388
R (adj.)

Notes:  See previous table for definition of TR1, TR2, CR. One observation per year for 121
Source: Own calculations, based on Austrian Social Security data.
                    Table 5: Spell characteristics

                                                     [N]   [ Fraction ]

         >= 3 months                             113252           .363
         >= 6 months                              47217           .151
         >= 9 months                              32175           .103
         >= 12 months                             25091           .080
         >= 24 months                             14480           .046

Mean completed duration (days)                                120.808

Exit status
          employment                             259533           .832
          retirement                               6815           .022
          long-term sickness                      16015           .051
          out of labor force                      23918           .077
          right censored                           5795           .019

Total                                            312076         1.000

Notes:   Mean completed duration = mean duration of
         unemployment for non-right-censored spells. Long-term
         sickness = sickness spell lasting longer than 3 months.
Source: Own calculations, based on Austrian Social Security data.
                  Table 6: The effect of REBP on the risk of long-term unemployment
                                           DiDiD - estimate

                            Before      During       After                    Time Difference
Location / year
                            policy      policy       policy             During-Before After-During

 A. Treated regions

           age 50-54         5.94        29.89       15.17                  23.95           -14.72
                            [6093]      [21910]     [8571]                  (.43)            (.50)

           age 46-49         4.13         4.19       5.35                    0.06            1.16
                            [9511]      [17131]     [9680]                   (.26)           (.28)

          Age difference:    1.81        25.70       9.82        DiD:       23.89           -15.88
                             (.37)       (.35)       (.45)                  (.50)            (.57)

 B. Control regions

           age 50-54          3.88        7.76       11.91                   3.87            4.15
                            [23690]     [54902]     [28286]                  (.17)           (.22)

           age 46-49          3.23        4.62        6.12                   1.39            1.50
                            [35111]     [64024]     [33167]                  (.13)           (.16)

          Age difference:    0.65        3.14        5.79        DiD:        2.48            2.65
                             (.16)       (.14)       (.23)                   (.21)           (.27)

                                                               DiDiD:       21.41           -18.53
                                                                            (.55)            (.63)

Notes:     Share of spells lasting longer than 12 months * 100; standard error in parentheses; number
           of observations in brackets.
Source:    Own calculations, based on Austrian Social Security data.
                             Table 7: The causal effect of REBP on unemployment duration: Accounting for policy endogeneity
                                                         Dependent Variable: Transition Rate to Jobs

                                           Strategy I                    Strategy II                       Strategy III                    Strategy IV
                                      The DiDiD estimator          Excluding steel workers           Favorable labor market             Employment and
                                                                                                     and small steel sector in          residence in TR2

REBP Introduced                            -.477 ***                      -.294 ***                        -.185 ***
                                          (.064)                         (.039)                           (.062)

REBP Abolished                              .390 ***                       .255 ***                         .185 ***                       -.186 **
                                          (.060)                         (.040)                           (.045)                          (.085)

REBP Abolished                                                                                                                              .185 ***

Change in Employment effect                                                                                                                 .034

Log likelihood                                 -3045483.1                   -2774739.5                        -2277674.8                       -154249.7
Number of spells                                 312076                       280871                            233223                           22091
Notes:     Asymptotic standard errors in parentheses. Standard errors adjusted for clustering within labor market regions (Lin and Wei, 1989). ***, **. *
           denotes 1%, 5%, and 10% level of significance. Controls: Marital status, education, skill level, nationality, hours in new job, recall, previous
           industry, unemployment, employment history, and regional unemployment rate in 45 to 54 age bracket (time-varying). See Table A1 for complete
           a) Strategy IV: First ’REBP abolished’ effect refers to group that is only resident but not previously employed in TR2. Second ’REBP abolished’
           effect refers to the group that is resident and previously employed in TR2.
           b) Change in employment effect measures the change in the ratio of the transition rate to regular jobs of individuals who are resident and have been
           previously employed in TR2 to the same transition rate of those who are just resident in TR2. This is the during program specification test.
Source: Own calculations, based on Austrian Social Security data.
     Table 8: The effect of benefit entitlement on the risk of long-term unemployment
                   Non-steel workers, aged 50 or older, resident in TR2

                                    Before        During        During          After
Residence / year
                                    policy       policy (I)    policy (II)      policy

Resident and employed                5.33           16.77         25.36          11.60
                                    [2948]         [5312]        [3225]         [3536]
                                      N               T             T              N

Just resident                        6.74           17.27         21.05          13.87
                                    [1351]         [2756]        [1601]         [1918]
                                      N               T             N              N

Employment effect                    -1.41          -.50          4.31          -2.27
                                     (.80)          (.88)        (1.27)         (.96)

DiD estimate:                                       .91           4.81          -6.59
                                                   (1.19)        (1.55)         (1.59)

Notes:     Share of spells lasting longer than 12 months * 100; standard error in
           parentheses; number of observations in brackets. N=Not eligible for extended
           benefis (REBP), T=eligible for extended benefits (REBP)
Source:    Own calculations, based on Austrian Social Security data.
              Table 9: Simulations of the effect of REBP on expected unemployment duration
                                            (measured in weeks)

                         Estimated      Expected          Effect on                          Increase in
                        Effect on log Unemployment      Unemployment        Increase per     percent of
                           hazard       Duration          Duration             week            Control

Referencea)                                 18.9

         Strategy I         -.477           52.7              33.8              .189           178.9
         Strategy II        -.294           36.4              17.5              .098            92.8
         Strategy III       -.185           28.7              9.8               .055            52.1
         Strategy IV        -.186           28.8              9.9               .055            52.4

Notes:  Strategy I: Entire sample; Strategy II: Excluding steel workers; Strategy III: Excluding TR2
        residents and steel workers; Strategy IV: TR2 residents, aged 50 or older, non-steel workers.
        a) Married, low education, blue collar worker, Austrian, looking for part-time or unknown type of
        job, not recall, inflow in first quarter, from other industry, unemployed at least once, and with
        average values of the continuous covariates (unemployment duration in the past, work experience,
        and regional unemployment rate).
Source: Own calculations, based on Austrian Social Security data.
                                             YHUVXV DJHV 
12                                                                               2.25

                                                                                 2          unemployment rate
                                                                                            ages(40-49), left scale

                                                                                 1.75       unemployment rate
                                                                                            ages(50-59), left scale
                                                                                            relative incidence of long-
                                                                                 1.5        term unemployment
                                                                                            right scale

 0                                                                               1
 1987   1988       1989   1990   1991    1992   1993     1994   1995   1996   1997
               5(%3                                    5(%3
               VWDUWV                                  HQGV




.03                                                                                     Control Regions (CRs)

.02                                                                                     Treated Regions (TR1s) REBP
                                                                                        06/1988 - 12/1991

.01                                                                                     Treated Regions (TR2s) REBP
                                                                                        06/1988 - 07/1993




   1986   1987   1988       1989   1990   1991   1992     1993     1994   1995   1996

                        5(%3                     5(%3            5(%3
                        VWDUWV                   UHIRUP          HQGV

                 T reat ed, age 50-54                     Cont rols, age 50-54
                 Cont rols, age 45-49





      0      4        8     12     16    20   24       28   32      36    40     44   48
                                  unemployment durat ion (months)
Table A1. Complete results.

                                                      Strategy I              Strategy II             Strategy III             Strategy IV

                                                   Coeff. Z-Value         Coeff.     Z-Value       Coeff.    Z-Value         Coeff.    Z-Value

REBP introduced (During * TR * Age 50+)             -.477    (-7.45)         -.294    (-7.47)        -.185     (-2.99)
REBP abolished (After * TR * Age 50+)                .390     (6.53)          .255     (6.35)         .185      (4.06)
During                                               .138     (7.73)          .132     (7.18)         .139      (7.04)
After                                                .011       (.82)         .006       (.42)       -.001       (-.05)
TR                                                   .005       (.20)        -.056    (-2.67)        -.090     (-2.31)
Age 50+                                             -.109    (-9.27)         -.105    (-9.02)        -.107     (-9.09)
TR * Age 50+                                        -.012      (-.43)         .018       (.73)        .119      (3.55)
During * TR                                          .059     (2.20)          .069     (2.60)         .065      (1.23)
During * Age 50+                                     .005       (.25)        -.009      (-.55)       -.036     (-2.20)
After * TR                                           .016       (.64)         .045     (2.08)         .023      (1.53)
After * Age 50+                                      .001       (.03)        -.009      (-.48)       -.051     (-2.64)

During I                                                                                                                        .019       (.39)
During II                                                                                                                       .172     (3.23)
After                                                                                                                           .128     (2.51)
Employment effect                                                                                                              -.025      (-.54)
Change in ’Employment effect’                                                                                                   .034       (.55)
REBP abolished for group ’just resident’                                                                                       -.186    (-2.18)
REBP abolished for group ’resident and employed’                                                                                .185     (2.78)

Benefit extension 1989
           30 to 39 weeks                            .004      (.34)          .010      (.74)        -.003       (-.23)
           30 to 52 weeks                           -.050    (-2.26)         -.027    (-1.63)         .015        (.89)
Marital status (single)
           married or cohabitant                     .185    (18.63)         .190     (18.46)         .197     (17.09)          .154     (4.26)
           separated                                 .020     (1.66)         .007       (.57)         .004       (.25)          .090     (2.46)
Education (low)
           medium                                   -.020     (-2.00)        -.019     (-1.70)       -.018      (-1.39)        -.016      (-.80)
           high                                     -.162     (-6.51)        -.161     (-6.55)       -.173      (-6.04)         .027       (.36)
Blue collar                                          .682    (33.23)          .706    (33.65)         .715     (28.95)          .695   (13.48)
Foreign                                              .021      (1.44)         .004       (.23)        .006        (.33)         .003       (.06)
Looking for a full time position                    -.043     (-2.66)        -.063     (-3.83)       -.075      (-3.98)        -.059    (-2.21)
Recall                                               .267    (17.11)          .272    (17.25)         .265     (14.59)          .375   (11.59)
Industry (other)
           steel                                    -.131     (-3.50)
           electronic machines                      -.125     (-4.92)        -.155     (-5.79)       -.135      (-4.89)        -.302    (-3.03)
           small machines                           -.166     (-2.67)        -.180     (-2.86)       -.185      (-2.63)        -.064      (-.17)
           other manufacturing                      -.021       (-.96)       -.033     (-1.38)       -.026        (-.92)       -.116    (-1.84)
           mining                                    .087      (1.93)         .083      (1.64)        .040         (.74)        .158     (1.35)
           construction                              .222    (14.41)          .238    (15.53)         .245     (13.72)          .215     (7.07)
           tourism                                  -.041     (-2.31)        -.042     (-2.22)       -.030      (-1.40)        -.161    (-3.08)
Inflow quarter (I)
           II                                       -.020 (-1.27)            -.031     (-1.72)       -.019        (-.97)       -.113 (-1.85)
           III                                      -.064 (-4.24)            -.093     (-5.42)       -.093      (-4.92)        -.061 (-1.21)
           IV                                       -.350 (-15.45)           -.367   (-15.81)        -.361    (-13.27)         -.402 (-10.59)
Unemployment history
           not unemployed                           -.436   (-27.82)        -.427    (-24.86)        -.400    (-23.23)         -.804 (-12.78)
           unemployment duration (years)            -.106   (-29.52)        -.109    (-27.71)        -.103    (-24.72)         -.146 (-15.26)
Work experience (years)                             -.017   (-13.44)        -.015    (-11.55)        -.012    (-10.07)         -.034 (-8.64)
Unemployment rate in region (%)                    -6.406   (-15.65)       -5.872    (-13.33)       -6.082    (-10.69)        -5.530 (-9.36)

Log likelihood                                       -3045483.10             -2774739.50              -2277674.80                -154249.67
Number of spells                                        312076                 280871                   233223                     22091
Notes:     a) Benefit extension coefficients are not identified because the sample is restricted to those living in entitled regions, aged 50
           or older.
           b) Sample restricted to non-steel individuals.
Table A2. Means and standard deviations

                                            Strategy I      Strategy II      Strategy III     Strategy IV
                                          Mean Std. Dev.   Mean Std. Dev.   Mean Std. Dev.   Mean Std. Dev.

Benefit extension 1989
     30 to 39 weeks                         .338             .344             .344             .000
     30 to 52 weeks                         .323             .312             .307             .000
Marital status (single)
     married or cohabitant                  .789             .790             .788             .827
     separated                              .111             .109             .109             .092
Education (low)
     medium                                 .412             .403             .403             .375
     high                                   .011             .011             .012             .009
Blue collar                                 .849             .856             .852             .870
Foreign                                     .110             .110             .112             .095
Looking for a full time position            .267             .261             .246             .314
Recall                                      .391             .422             .421             .413
Industry (other)
     steel                                  .100             .000             .000             .000
     electronic machines                    .033             .037             .031             .071
     small machines                         .002             .002             .003             .001
     other manufacturing                    .063             .070             .064             .109
     mining                                 .015             .017             .014             .030
     construction                           .439             .487             .496             .428
     tourism                                .120             .133             .140             .089
Inflow quarter (I)
     II                                     .139             .128             .129             .122
     III                                    .132             .125             .124             .125
     IV                                     .421             .432             .432             .435
Unemployment history
     not unemployed                         .220             .188             .181             .250
     unemployment duration (years)         1.224 (1.284)    1.304 (1.299)    1.325 (1.305)    1.139 (1.266)
Work experience (years)                   16.225 (4.706)   16.173 (4.641)   16.121 (4.630)   16.832 (4.665)
Unemployment rate in region (%)            4.294 (2.398)    4.212 (2.299)    4.054 (2.161)    5.099 (2.740)

Number of spells                          312076           280871           233223           22091
Table A3. Definition of variables.

REBP                                             Regional extended benefit program: benefits extended from 30 weeks to
                                                 209 weeks for individuals age 50 or older, living in TR, from 1988.06 to

REBP introduced (During * TR * Age 50+)
REBP abolished (After * TR * Age 50+)
During                                           1 after 1988.06
During I                                         1 after 1998.06
During II                                        1 after 1992.01 (reform)
After                                            1 after 1993.08
TR                                               1 if Treated region 1 or Treated region 2 (see text for details).
TR1                                              1 if Treated region 1
TR2                                              1 if Treated region 2
TR2 Residence                                    1 if individual lives in TR2
TR2 Employment                                   1 if individual was previously employed in TR2
Age 50+                                          a
TR * Age 50+                                     a
During * TR                                      a
During * Age 50+                                 a
After * TR                                       a
After * Age 50+                                  a
Benefit extension 1989
     30 to 39 weeks                              1 after 1989.08 and age < 50
     30 to 52 weeks                              1 after 1989.08 and age >= 50 not in TR during REBP
Marital status
     single                                      a
     married                                     a
     separated                                   a
     low                                         9 years of schooling (mandatory)
     medium                                      apprenticeship
     high                                        vocational, university degree
Blue collar                                      a
Foreign                                          a
Looking for a full time position                 1 if individual indicates that she or he is looking for a 100% position
Recall                                           1 if employer will re-hire the person
     other                                       a / agriculture, mining, food, textiles, wood, services (all except tourism)
     steel                                       a
     electronic machines                         a
     small machines                              a
     other steel                                 a
     mining                                      a
     construction                                a
     tourism                                     a
Unemployment history
     Not unemployed                              a
     Unemployment duration (years)               Unemployment duration since January 1972,
                                                 at start of unemployment spell
Work experience (years)                          Years spent in regular employment since January 1972,
                                                 at the start of the unemployment spell
Unemployment rate in region (%)                  Regional unemployment rate, ages 45-54, on May 10 of respective year,
                                                 used as time-varying covariate.

Note: a. Variable is a dummy that takes the value 1 if the condition is fulfilled.
                             IZA Discussion Papers
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475        Z. Hercowitz            A Macroeconomic Experiment in Mass                 1             04/02
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476        W. A. Cornelius         Labor Market Incorporation of Immigrants in        1             04/02
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478        H. Gersbach             Uneven Technical Progress and Unemployment         3             04/02
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479        J. T. Addison           Unions and Employment Growth: The One              1             04/02
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480        G. Saint-Paul           The Complexity of Economic Policy:                 6             04/02
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481        E. Schlicht             Hiring Standards and Market Clearing               1             04/02

482        P. Kuhn                 Leadership Skills and Wages                        6             04/02
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483        H. Rapoport             In-Group Cooperation in a Hostile Environment:     1             04/02
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484        J. H. Bishop            Institutional Effects in a Simple Model of         5             04/02
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485        L. Woessmann            Class-Size Effects in School Systems Around        5             04/02
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486        A. L. Booth             Who pays for General Training? New Evidence        6             04/02
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487        R. L. Lumsdaine         Identifying the Common Component of                2             04/02
           E. S. Prasad            International Economic Fluctuations:
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488        A. Ciccone              Identifying Human Capital Externalities:           1             04/02
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489        D. Del Boca             Employment Patterns of Husbands and Wives          5             04/02
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490        W. F. Richter           Social Security and Taxation of Labour Subject     2             05/02
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491        R. Rotte                On the Production of Victory: Empirical Deter-     5             05/02
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492        R. Lalive               Benefit Entitlement and Unemployment               6             05/02
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      An updated list of IZA Discussion Papers is available on the center‘s homepage

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