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Does a reduction in benefit payment duration increase employment?
Evidence from the German “Hartz Reforms”
ISEO Summer School 2012
Felix König - London School of Economics
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Content
1. The unemployment crisis2. The German labour market and reform3. A simple search model4. The effect of the labour market reform
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Unemployment duration as % of the total labour force
OECD Employment Outlook 2011
Rising long-term unemployment, even in flexible labour markets
Crisis German labour market Model Reform results Inequality
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Unemployment during the crisis
OECD Employment Outlook 2011
Crisis German labour market Model Reform results Inequality
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Questions of this presentation
1. What is the reason for the German success?
1. What can be done to tackle high unemployment rates?
2. Is Merkel’s labour market reform agenda for Europe non-sense?
Crisis German labour market Model Reform results Inequality
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“Sick man of Europe”
German unemployment rate
OECD quarterly Data
in %
Peter Hartz
Crisis German labour market Model Reform results Inequality
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A job miracle?German unemployment rate
OECD quarterly Data
in %
Falling unmployment since Q1 2006
Peter Hartz
Crisis German labour market Model Reform results Inequality
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Duration of unemployment benefit
Three changes allow for identification
Crisis German labour market Model Reform results Inequality
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A difference in difference framework
Reasons for being in the treatment group:
1. Older than a comprable individual
1. More work experience than a comprable individual
1. Timing of work experience at an unfortunate point in time
Crisis German labour market Model Reform results Inequality
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Difference in Difference assumptions
beforeyit1 = ci +λt + uit
after
yit+1 = ci + λt+1 + α + uit+1
beforeyjt1 = cj + λt +ujt
after
yjt+1 = cj + λt+1 + ujt
Affected Non-affected
∆ yit+1 = λt+1 – λt + α + ∆ uit+1 ∆ yjt+1 = λt+1 – λt + ∆ ujt+1
Need common trend for identification
Crisis German labour market Model Reform results Inequality
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In a DID regression set up
yit = θt + Xit'β + δ After + γ Treated+μ(A*T)estimates -8.4 2.1 -1.7White standard errors (0.7) (0.5) (0.7)
Covariates: monthly time dummies, age dummies, education dummies, work experience dummies and a gender dummy
Unemployment duration in months
Crisis German labour market Model Reform results Inequality
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Effect of UI payment duration reform
• A one-week reduction in BPD leads to 1.32 days reduction in the unemployment duration
• The average unemployment spell length decreased by about 9 days
• This amounts to 37,5 % of the decline in spell duration in Germany since 2006
Crisis German labour market Model Reform results Inequality
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Labour market flows
Elsby, Smith, Wadsworth (2010)
Change in unemployment not necessarily due to employment
Crisis German labour market Model Reform results Inequality
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A simple search model
Behaviour changes as benefit expiry approaches
Objective function:(roughly following Mortensen 1977)
FOCs evaluated in the initial period of unemployment (U = UT):
2.
1.
c: search cost in units of consumption s: search intensity wR: reservation wage U: value func. of being unemployed b: benefitsλ(s): rate of job offer arrivals ( λ’>0 & λ’’<0 ) u: instantaneous utility W: value func. of working s*: threshold of search activity, below it a person is considered inactive
Stylised time pattern of the exit rate
T Time
Exit rate
Job finding rate
Job finding + becoming inactive
Exit rate from unemployment
T Benefits expire
Crisis German labour market Model Reform results Inequality
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Estimating the exit rateThe hazard rate is the probability that an individual leaves unemployment in a given time interval (months in this case):
Crisis German labour market Model Reform results Inequality
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Conclusions about spell duration
• Unemployment duration was reduced by 1.7 months
• The time to find a new job fell by 1.3 months
• But only 17% of the unemployed affected
Effect on the treated
Crisis German labour market Model Reform results Inequality
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Unemployment duration
-24 days
Total change
-7days
Matchingefficiency
Inactivity
-2 days
Residual
-15 days
Reform
Refrences• Card, Chetty, & Weber. (2007). The Spike at Benefit Exhaustion. American
Economic Review , 97 (2), 113-118.
• Mortensen. (1977). Unemployment Insurance and Labour Supply Decision. Industrial and Labor Relations Review , 30 (4), 505-517.
• OECD Employment Outlook 2011
• Socio-Economic Panel (SOEP), data for years 1984-2009, version 26, SOEP, 2010
• van-Ours, & Vodopivec. (2006). How shortening the Potential Duration of Unemployment Benefits Affects the Duration of Unemployment: Evidence from a Natrual Experiment. Journal of Labour Economics , 24 (2), 351-378.
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Reply to questions:• Question: Maybe the affectedgroup takes different jobs compared to the unaffected(e.g. due to training differences among age groups). The common trend assumption might therefore fail.• Reply:
1. The responsiveness to shocks before 2006 can be tested directly. Such worries are unwarranted according to previous slides.2. For differential shocks that only occur after 2006 can only do indirect testing. Consider Industries with greatest share of job creation for the two groups. Four of the top five job creation industries are identical. No other industry creates more than 5% of jobs. Hence differential developments across industries are unlikely to bias the results.
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