Do Unemployment Benefits Create Jobs or Redistribute Them? A Macro-Level Analysis of the Displacement Effect

Abstract This study investigates the macroeconomic effects of unemployment benefits on unemployment and employment rates within a general equilibrium framework. Utilizing annual data from 10 OECD countries over the period 2000–2022, the analysis applies second-generation panel data methods to account for cross-sectional dependence and country-specific heterogeneity. The empirical strategy employs the Pesaran (2004) CD test for cross-sectional dependence, the Westerlund (2007) test for cointegration, and estimates long-run elasticities using the Dynamic Common Correlated Effects Mean Group (DCCE-MG) and Augmented Mean Group (AMG) estimators. The results indicate that unemployment benefits significantly reduce the unemployment rate (β = −0.409) while exerting a modest but positive effect on the employment rate (β = 0.031). This discrepancy suggests that unemployment assistance primarily operates through a displacement mechanism—redistributing access to existing jobs rather than generating new employment—rather than inducing the disincentive effects predicted by the standard moral hazard hypothesis. Furthermore, DCCE-MG estimates reveal substantial cross-country heterogeneity, with positive employment effects observed in France and the Netherlands, contrasting with negative effects in Finland. These findings highlight the importance of accounting for cross-sectional dependence in evaluating labor market policies and demonstrate that the effectiveness of unemployment benefits is contingent upon institutional complementarities rather than spending levels alone. JEL Classification C23 · E24 · J64 · J65 · H53