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«IZA DP No. 2514 Activation Policies in Germany: From Status Protection to Basic Income Support Werner Eichhorst Maria Grienberger-Zingerle Regina ...»

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At this stage, there are no empirical studies on the micro-level regarding changes in the duration of unemployment spells, the return to employment, the quality of subsequent employment and the effects of activating interventions. The same holds for potential explanations of developments on the macro-level except for a study that shows an increase in matching efficiency due to the Hartz reforms (Fahr/Sunde 2006).

At this point in time only a preliminary empirical assessment is possible.

However, causal statements can hardly be made. In addition, some findings can be based on simulation studies and on comparisons between benefit levels and equivalent market wages.

6.1 Open Unemployment

The peak in registered unemployment in early 2005 with more than five millions unemployed, an all-time high, is largely due the combination of seasonal effects and the statistical effect of (capable of working) former social assistance recipients and their partners being registered as unemployed for the first time after Hartz IV came into force. This explains an increase in unemployment of about 350.000 to 400.000. In that sense, Hartz IV contributed to more open unemployment by providing greater transparency in German labor market statistics as former social assistance recipients capable of working are now more “visible“. At the same time, hidden unemployment decreased so that broad unemployment remained stable (Konle-Seidl/Lang 2006, see table 5).

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The recent decline in registered unemployment to less than 4 millions in November 2006, however, can in part be explained by a positive economic environment. There may be some motivation effect of Hartz IV on the unemployed in the sense that the eventual transfer to means-tested and flat-rate UB II increases search intensity and reduces reservation wages during the receipt of UB I. However, there is no systematic evidence on this so far.

6.2 Benefit Receipt

On the other hand, recent data on the number of beneficiaries show that there is a divergent development of transfer receipt in UB I and UB II. While figures of UB I receipt, i.e. short-term unemployment, decline, the number of UB II beneficiaries has increased considerable over the last 24 months. This means that the coverage of the unemployed by insurance benefits declines whereas reliance on basic income becomes more important. The relation is now approximately four fifths on UB II and one fifth on UB I (figure 4). Hence, basic income is of growing relevance regarding the structure of benefits in the German welfare state. Compared to unemployment insurance benefits, means-tested basic income is now the more important welfare scheme. However, most recent figures also show some decline in UB II.

Figure 4: Recipients of Unemployment Benefits I and II, 2004-2006 5.10 4.50

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2.07 1.86 1.24

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While the number of UB II beneficiaries increased strongly, data on individual benefit spells in 2005 shows that there is considerable mobility in and out of UB II (Graf/Rudolph 2006). About 74 percent of all households in need in January 2005 depended on benefits throughout the year while 26 percent could leave UB II. Households entering UB II later in 2005 had a higher chance of leaving basic income support within 12 months (43 percent). Continued benefit dependency over twelve months was most frequent with lone parents who could opt for an exemption from the job search requirement.

6.3 Earnings

However, UB II is not only received by long-term unemployed, but also by people entering the labor force and by employees or self-employed without sufficient earnings to pass the threshold of guaranteed basic income. In this respect it is most notable to see that about one million of all UB II recipients have income from earnings, i.e. about one fifth of all UB II beneficiaries are employed on either low hours or low wages (Bundesagentur für Arbeit 2006b). Only a smaller share of UB II recipients works full-time (see figures 5 and 6). But due to current earnings disregard clauses, there are strong incentives to work part-time and top-up low earnings from low hours by UB II (Aufstocker). Through this arrangement, UB beneficiaries can earn EUR 160 on top of their benefit through part-time work, in particular with the Minijob arrangement that provides for flexible jobs with an earnings ceiling of EUR 400 per month exempt from employees’ social insurance contributions and taxes. This concerns about 500.000 people. They can hardly improve their net income by moving to longer working hours as additional earnings lead to benefit withdrawal. Hence, Hartz IV provides for a general und unlimited in-work benefit and strong part-time incentives. This also means that benefit recipients are relatively indifferent when faced with wage cuts imposed by employers in sectors not covered by collective agreements.

Figure 5: Earnings Combined with UB II Receipt, September 2005

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32% 20% 21% 508 € 491 € 477 € 446 € 12% 298 € 250 € 275 € 186 €

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100 - 200 200 - 300 300 - 400 400 - 500 500 - 600 600 - 700 700 - 800 800 - 900 900 - 1000 1000 - 1100 1100 - 1200 1200 - 1300 1300 - 1400 1400 - 1500 1500 - 1600 1600 - 1700 1700 - 1800 1800 - 1900 1900 - 2000

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The part-time incentive is particularly relevant with respect to needy households with dependent children where realistic equivalent market wages to be earned when moving from long-term unemployment to regular jobs with low qualification requirements in the private service sector are close or even inferior to the benefit level (Boss/Christensen/Schrader 2005, Brenke 2006, Cichorek/Koch/Walwei 2005, see table 6). Employment disincentives are more significant in these cases, and part-time work will provide for an additional earnings top-up. This does not only hold for earnings from regular part-time but also for One Euro Jobs that provide approximately EUR 1.00 to 1.50 per hour in addition to full benefits.

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6.4 Public Expenditure Regarding public expenditures, the implementation of Hartz IV in 2005 led to higher rather than lower public expenditure and to an increase rather than a decline in the number of benefit recipients as compared to 2004. This has to do not only with incorrect prior estimations (due to unreliable statistics) but also with some legal provisions that allow for individual benefit receipt by young unemployed, migrants and fake single households, but also to the unintended emergence of a broad in-work benefit scheme. For 2006, planned expenditures amount to EUR 47 billions (figure 7). However, actual expenditure might reach about EUR 50 billions which is approximately EUR 10 billions more that expected at the outset. At the same time, however, unemployment insurance will run a surplus of about EUR 10 billions. Expenditure increases in UB II and related active labor market policies reflects the shift from unemployment insurance to basic income which also means a shift from contribution-based to tax-funded passive and active labor market policy schemes (Kaltenborn/Schiwarov 2006a, 2006, Kaltenborn/Knerr/Schiwarov 2006).

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3.3 7.6 6.6 6.4 25.0 24.4 14.6 18.8 12.1 12.4 11.0

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6.5 Poverty There is no information so far on the effects of the shift towards activation in Germany on unemployment duration or on stability and quality of subsequent employment. The same holds empirical evidence driven impact on wage dispersion and inequality before and after taxes and benefits. This will only become available later. However, simulation studies (Becker/Hauser 2006, see figure 8) point at a slight increase in poverty due to Hartz IV although this studies do not take into account potential dynamic effects on reemployment. As with changes in benefit generosity, the effect on poverty is assumed to be most pronounced in East Germany.

Figure 8: Poverty Before and After Hartz IV 22.1 19.3 15.3 14.2 14.6 14.5 14.4 14.1 13.6 13.5 13.5 12.5 12.2 12.3

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6.6 Overall Assessment Although it is rather early for a preliminary assessment of the outcomes of the shift towards activation in Germany, empirical information available so far suggests at a differentiated judgment. On the one hand, empirical evidence shows a remarkable shift to a more goal- and efficiency-oriented approach within contribution-based active schemes administered by BA. Interim results on the evaluation of BA reorganization also show positive results (Bundesregierung

2006) as do empirical studies on matching efficiency (Fahr/Sunde 2006), yet some of the evaluation studies on specific active labor market programs within unemployment insurance are a bit inconclusive (Bundesregierung 2006, Jacobi/Kluve 2006). Stronger profiling and goal-orientation in the assignment of active schemes to short-term unemployed helps explain the savings in contribution-based active and passive labor market policies even though actual sanctioning is moderate.

The situation is different, however, with respect to activation of the long-term unemployment under SGB II, i.e. recipients of UB II. Effects on benefit levels are highly differentiated with respect to household composition and prior earnings.

Yet, there has not been a bold cut in benefit generosity, but even some expansion.

At the same time, current benefits are equal or even superior to equivalent market wages for people with a low earnings potential in the private sector. In such a system, activation crucially depends on frontline implementation of demanding and enabling schemes and the actual application of benefit conditionality. But anecdotal evidence and some partial empirical data suggest a moderate approach towards activation in actual practice, i.e. regarding use of integration agreements, work test or sanctions.

The moderate level of activation in practice may be explained by several factors:

disincentives embodied in the existing funding and governance arrangements in particular with regard to effective activation of potential long-term unemployed;

a high level of legal codification which, together with a lack of a coherent normative framework and ambiguous institutional incentives, may lead to reluctant implementation in local agencies and by frontline staff. In addition, the perceived, but also actual lack of jobs for the low-skilled may hamper activation through job offers and inhibit entry into gainful employment.

This is not only to be explained by weak labor demand due to unfavourable business cycle conditions in 2005 and early 2006, i.e. until recently, but also by institutional preconditions limiting labor market flexibility and wage dispersion while at same time creating strong incentives to combine benefit receipt with partial labor market attachment only. The difficulty of entering the German labor market is largely due to the fact that policies create specific compartments or segments of low-wage and flexible employment such as benefit top-up/Minijobs, subsidized employment and One Euro Jobs with transitions to higher wages or more stable employment being rather problematic.

A partial liberalization in dismissal protection, the easing of restrictions on temporary agency work and product market regulations such as the lifting of the requirement of a master craftman’s diploma (Meisterbrief) in some crafts sectors was certainly not sufficient in this respect (Eichhorst/Kaiser 2006). It was not possible to implement more far-reaching reforms that could stimulate labor demand and increase the supply of entry-level jobs.

7 Summary and Outlook

Germany embarked on the shift towards activation much later that its European neighbors, but this policy change was in many respects more fundamental and comprehensive as it implied a major break with the welfare state tradition which had been characterized by the social insurance logic of a “Bismarckian” system.

Passive, status protecting benefits had been used in the past to buffer economic adjustment. Against this background, policy change from status and occupational orientation in favour of basic income support for the long-term unemployed in combination with stricter formulation and potential enforcement of “sleeping” demanding elements is a major element of “path departure” and recalibration of rights and obligations in the German welfare state. This also implied a major overhaul of active labor market policy schemes and governance.

But the shift towards activation is not just a “technical” issue and an example of implementing New Public Management principles in Germany.

The late, but fundamental change in Germany is most notable in comparison with other European countries such as the UK, Denmark, the Netherlands or Sweden as the German approach to activation is relatively broad and ambitious as “capability of working” is defined mainly in a medical sense so that the number of people to be activated is much higher than elsewhere, in particular given the fact that alternative escape routes do not play a prominent role in Germany these days (i.e. disability benefits) or are being closed (e.g. early retirement). This dramatically increases transparency regarding nonemployment and lead to high open (registered) unemployment at the beginning of the activation of the long-term unemployed with the Hartz IV reform.

Contrary to widespread perceptions, however, stronger activation is not associated with a general decline in benefit levels – even not for the long-term unemployed – as Hartz IV is not only activation, but also a social policy reform widening access to benefits and assistance. Rather the severance of the link between benefits for the long-term unemployed and prior earnings changed the perception of benefit generosity. This may – in conjunction with more demanding interventions by administrative bodies – change job search effort due to increased fears of downward mobility in case of longer unemployment spells (Eichhorst/Sesselmeier 2006).

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