Persistence of Welfare Receipt and Unemployment in Germany: Determinants and Duration Dependence

Abstract

AbstractAlthough the German economy managed the last economic recession comparatively well, it suffers from high and stagnating long-term unemployment and benefit receipt. This article is the first to study the duration and determinants of welfare benefit (“unemployment benefit II”) receipt in Germany as a whole, with special attention on duration dependence. The recipients of the means-tested household benefit are not necessarily registered as unemployed, but are, for example, employed with insufficient earnings, in training measures or economically inactive. Due to the heterogeneous situations of welfare recipients, separately studying welfare receipt and unemployment is necessary. By using exceptionally rich administrative data on a 1% random sample of welfare recipients from between 2005 and 2014, we estimate discrete-time hazard rate models that control for unobserved heterogeneity. The first benefit and unemployment episodes for first welfare recipients between 2006 and 2012 (n = 26,163) are traced monthly until 31 December 2014. Recipients leave unemployment more quickly than welfare. Sociodemographic characteristics, labour market resources and the duration seem to affect both processes. Household composition is less important for leaving unemployment than for leaving welfare. Overall, the results indicate that leaving unemployment and leaving welfare receipt are two different processes that need distinct policies.