Unemployment Compensation and Wages: Evidence from the German Hartz Reforms

Abstract

Summary Using the introduction of fixed unemployment assistance in Germany in 2005 as a unique natural experiment, we find strong evidence that decreased unemployment compensation has an adverse effect on wages. We use micro panel data to identify and estimate the effect of this structural break. In eastern and western Germany, the relative effect is higher for women. In western Germany, the relative effect increases with skill level. In eastern Germany, there is no clear skill-specific pattern.

The labor market for older workers in Germany

“…On recent labor market reforms disproportionally affecting older workers, see Ammermüller et al (2006), Steiner and Schmitz (2007), Dlugosz et al (2014); on pension reform, see, e. g., Börsch-Supan and Berkel (2004) and Hanel (2012). 3 Arent and Nagl (2013) attempt to identify the wage effects of one particular component of the German labor market reforms introduced in 2005, namely the "unemployment benefit II" ("Hartz IV") reform, by the difference in the trend in wages after and before the reform. There is, of course, no reason to believe that the overall time trend in wages after the reform would have been, in the absence of the reform, the same as before the reform.…”

The evolution of job stability and wages after the implementation of the Hartz reforms

“…The paper by Arent and Nagl (2013) is relevant because it claims to estimate the effect of the Hartz reforms on wages. Their central result, a structural break in the wage equation in the year of the benefit reforms, differs from the findings mentioned above and from ours (we find that wages started to decrease before 2005; see also Ludsteck and Seth (2014) for a comment).…”

Better Safe than Sorry? The Effects of Income Risk and Unemployment Risk on Wages

“…3 This should be the case in Germany. The short-term unemployment benefit is a proportion of a worker's former net wage whereas the long-term unemployment benefit has a fixed value (Arent and Nagl, 2013). 4 Card et al (2013) illustrate the increasing wage inequality in West Germany, which takes place since the mid-1990s.…”

“…7 In addition to the strong worldwide demand also the far-reaching labor market reforms came into effect in Germany (German Council of Economic Experts, 2011). Especially the Hartz-IV reform of 2005 may be responsible for the decreasing of the unemployment risk (Arent and Nagl, 2013). 8 A detailed description of the data can be found in the study by Schmucker and Seth (2009).…”

“…This should be the case in Germany. The short‐term unemployment benefit is a proportion of a worker's former net wage whereas the long‐term unemployment benefit has a fixed value (Arent and Nagl, ).…”