Time Aggregation and State Dependence in Welfare Receipt

Authors


  • We thank the editor Frederic Vermeulen and two anonymous referees for their comments and suggestions, which helped to greatly improve the article. We also thank Rolf Aaberge, Wiji Arulampalam, Tony Atkinson, Steve Bond, Stéphane Carcillo, Ian Crawford, Herwig Immervoll, Stephen Jenkins and Arvid Raknerud for their comments. We are grateful for the questions and suggestions received from seminar participants at the University of Oxford, the IZA/OECD/World Bank conference on Social Safety Nets in Paris, the IAB conference on Dynamics of Low Wage, Low Pay and Transfer Receipt in Nuremberg, the Institute for Social Research in Oslo and the 2014 Annual Conference of the Royal Economic Society in Manchester. Financial support from the Research Council of Norway (194339), the European Union as part of the joint OECD/EU project ‘Multi-country Database on Benefit Recipients and Analysis of Recipiency Patterns’ (2010-13) and the INET grant INO1200010 by the Institute for New Economic Thinking at the Oxford Martin School is gratefully acknowledged. While carrying out this research, Brinch has been associated with the centre of Equality, Social Organization, and Performance (ESOP) at the Department of Economics at the University of Oslo. ESOP is supported by the Research Council of Norway. The usual disclaimer applies. In particular, the opinions expressed and arguments employed herein are solely those of the authors and do not necessarily reflect the official views of Statistics Norway, the OECD, the European Union or OECD or EU member countries.

Abstract

This article tests the validity of the conditional Markov assumption in a dynamic discrete-choice model of welfare benefit receipt dynamics, using Norwegian administrative data. Exploiting its implied time aggregation properties, we find that the model is seriously mis-specified. Estimated state dependence varies strongly with the time unit of analysis, with the average treatment effect of past benefit receipt increasing with the level of aggregation. When permitting richer types of benefit dynamics, we find evidence for duration and occurrence dependence in benefit receipt and disparities in the effects of observed and persistent unobserved characteristics on the benefit entry and persistence processes.

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