Distributional and Behavioural Effects of the German Labour Market Reform

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08006.pdf Non-technical summaryWe estimate the effects of the introduction of the Unemployment Benefit II (UBII) as reform of the German Unemployment Insurance that replaced the wage related UnemploymentAssistance with an income maintenance program and stronger means testing.We model the German tax-benefit system and use the waves of the German SocioEconomic Panel (GSOEP) for 2004 and 2005. We define the "Group A" as people who are "Affected" by the reform. Within this Group A, we also subsume people who were not eligible to any benefits in the status quo and who become eligible after the reform.The aim of the paper is twofold. First we are interested in the distributional effects of the reform for the entire population and for several subgroups. Second, we estimate a discrete labour supply model to estimate the labour supply effects. Furthermore we use the estimation results to simulate the distributional effects that correspond to the labour supply effects by applying the pseudo-distribution method.The introduction of UB II has led to a consolidation of the benefit system. The presumption that people who used to receive high UA-benefits because they had higher earnings (before unemployment) are losing most is confirmed. We find that six deciles (seven deciles) are losing income as a consequence of the reform with consideration of behavioural effects (without behavioural effects). We identify reform winners in the subgroups of (1) former recipients of social assistance and of (2) new recipients. The largest gains accrue to households with many children and to households who have not been eligible for any benefits before. These households become eligible, because of the less restrictive non-earned-income test compared to the old social assistance. For the whole group of benefit recipients, namely "Group A", we find a reduction of the income inequality accompanied by a positive effect on the poverty measures. This effect is in line with the theoretical considerations. The new benefit system has a tendency to equalize the transfer payments on a level that is slightly higher than the old social assistance level.These results are also confirmed by the labour supply effects. We find negative participation effects for women with children in couple and single households. In the opposite, couples without children, single men and women without children increase their participation. T...

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