Abstract

In the 1990s, Germany saw a massive rise in unemployment of workers in their late 50s compared to younger workers. We show that a large share of this can be explained by the interaction of UnemploymentInsurance (UI) and the retirement system, where UI benefits affectlabor supply by inducing individuals to leave employment. We showmassive amounts of sharp bunching in UI inflows at age thresholdsthat allow for using UI as a bridge to early retirement. The bunchingmass moves as the age threshold moves due to reforms of the UI or retirement system.To quantify the impact of this channel on labor supply, we use ourreduced form evidence to estimate a dynamic life-cycle model of laborsupply that endogenizes unemployment and retirement transitions. Basedon this we show that the increase in potential benefit durations inthe late 1980s increased unemployment rates for workers aged 55-59by around 3 percentage points (about a 30 percent increase), playinga major role in the large increases in unemployment rates for olderworkers.