Alessandro Nali (ETH Zürich)
Cristina Tealdi
This paper studies how the shape of unemployment benefit reductions affects job search behavior. We exploit a reform in Italy that replaced a large, delayed benefit cut with small monthly reductions, while keeping benefit level, and eligibility comparable for a subset of workers. Using administrative data and a flexible duration model, we compare unemployment exit patterns for individuals with similar potential benefit durations. Gradual reductions generate substantially higher exit from unemployment rates, whereas the large discrete cut induces no detectable response until benefit exhaustion. The cumulative effect is large: early hazards under the gradual schedule are nearly fifty percent as high, and unemployment spells are significantly shorter. Faster exits do not lead to lower wages, but they do result in shorter job durations and lower contract upgrading, indicating a deterioration in post-unemployment job quality. These findings show that small, continuous benefit declines can sustain search incentives more effectively than infrequent, salient cuts, highlighting the importance of benefit timing and profile in unemployment insurance design.