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

Although getting comparatively well through the last great recession, the German economy suffers from a high and stagnating incidence of long-term unemployment and benefit dependency and solutions for this problem are urgently needed. We are the first to study duration of benefit receipt and its determinants in the German basic income support for needy individuals capable of working (“unemployment benefit II, UBII”) as a whole and pay special attention to duration dependence.

Rich administrative data on welfare recipients became only available after the introduction of the UBII in 2005. Administrative data have several advantages over survey data: First, the large number of observations enables us to study effect heterogeneity. In particular, merging regional information allows us to consider regional heterogeneity. Moreover, administrative data on benefit receipt are based on actual payments of the welfare agencies to the recipients and thus can be regarded as highly reliable. This is not necessarily true for survey data, where individuals tend to underreport their benefit receipt.

As the welfare benefit is a means-tested household benefit, not all recipients are registered unemployed, but some are e.g. employed with insufficient earnings, participating in training or are economically inactive (e.g. due to child care obligations). This makes it necessary to study welfare receipt and unemployment separately.

Using exceptionally rich administrative data from the German Federal Employment Agency on individuals who received welfare benefit between 2006 and 2012, we estimate discrete-time hazard rate models that control for unobserved heterogeneity. Our results indicate that the chances of leaving welfare are determined by welfare duration, household composition and labour market resources. The chances of leaving unemployment are generally higher than those of leaving benefit receipt. They are also affected by duration dependence and labour market resources, but to a lesser extent by household composition.