Unemployment Compensation and Wages: A Difference-in-Differences Approach to Assessing the Wage Effects of the German Hartz Reforms

Abstract

Abstract This paper examines the influence of the level of unemployment assistance (Arbeitslosengeld II) on the wage level by exploiting a quasi-natural experiment formed by the German Hartz reforms in 2005. Estimations are based on data from the Socioeconomic Panel ranging from 2000 to 2007. As dependent variables both real monthly gross salary and real hourly gross wage are used. Firstly, following the approach taken by Arent and Nagl (2013, Unemployment Compensation and Wages: Evidence from the German Hartz Reforms. Jahrbücher für Nationalökonomie und Statistik 233 (4): 450–466), a before-after estimator is applied. Secondly, in contrast to the replication study by Ludsteck and Seth (2014, Comment on „Unemployment Compensation and Wages: Evidence from the German Hartz Reforms“ by Stefan Arent and Wolfgang Nagl. Jahrbücher für Nationalökonomie und Statistik 234 (5): 635–644) a control group is constructed and a difference-in-differences estimator (DiD) is used for further assessment. The results of the before-after estimation indicate a negative influence of the unemployment assistance reform on wages. However, the corresponding placebo regressions cast doubt on whether the estimated effect is a policy effect. The DiD approach shows that substantial time effects exist. This indicates that the before-after estimator is not suitable for assessing the policy effect. Applying the DiD estimator, a negative significant policy effect is only identified for men in West Germany.