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State dependence in welfare receipt: transitions before and after a reform

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Abstract

We study state dependence in welfare receipt and investigate whether welfare transitions changed after a welfare reform. Using data from the German Socio-Economic Panel, we apply dynamic multinomial logit estimators and find that state dependence in welfare receipt is not a central feature of the German welfare system. We find that welfare transitions changed after the reform: Transitions from welfare to employment became more likely and persistence in welfare and inactivity declined. We observe a large relative increase in transitions from employment to welfare. Immigrants’ responsiveness to the labor market situation increased after the reform.

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Notes

  1. For evidence on reforms in the UK, Sweden, and Canada see, e.g., Brewer et al. (2006), Edmark (2009), and Fortin et al. (2004).

  2. Fahr and Sunde (2009) and Klinger and Rothe (2012) find that the early Hartz Reforms significantly improved the efficiency of labor market matching, benefiting particularly the long-term unemployed. Several studies evaluated the effects of elements of the reform packages (e.g., Huber et al. 2011). Caliendo and Hogenacker (2012) summarize that labor market institutions became more efficient and work incentives for the unemployed increased after the reform.

  3. Ethnic Germans are former German citizens or those belonging to the German people. After World War II, many migrated to West Germany and were granted German citizenship (Dietz 1999). Immigrants residing in Germany in order to find employment are generally not eligible for benefits. However, a long list of circumstances renders EU citizens eligible for UB II receipt even then (BMAS 2009).

  4. We use the household as the unit of analysis because (i) welfare eligibility is, to a large extent, determined by household circumstance and (ii) our data measure social assistance receipt only at the level of the household. Households are also used as the unit of analysis in a comparable study by Hansen et al. (2014), for instance.

  5. This information comes from a “migration background”-indicator in the data, which considers first- or second-generation immigrant status independent of citizenship (for details, see, Frick and Lohmann 2010).

  6. Other studies use similar sample selection criteria to analyze differences between immigrants and natives (e.g., Kogan 2004; Riphahn 2004). For a discussion, see also Schnabel (2015). In contrast, the study by Königs (2014) investigates differences between East Germany and West Germany but not between natives and immigrants.

  7. The pre- and the post-reform samples cover periods of different length. We use fewer waves for the pre-reform period than for the post-reform period in order to be able to include the SOEP innovation sample F, which started in 2000.

  8. Across all years, we observe that 17 and 30 % of inactive native and immigrant households have unemployed heads, respectively.

  9. In an online appendix, we show further descriptive statistics by labor market and immigrant status: Comparing welfare recipients and employed households, we observe small differences in the number of children while the share of married household heads is clearly smaller among welfare recipients. The share of single parents is considerably higher among welfare recipients than among households classified as inactive or employed. The figures also indicate a difference in average education between employed households and welfare recipients of 2 years among natives and 1 year among immigrants.

  10. This approach in the spirit of Mundlak (1978) and follows the literature (see, e.g., Stewart 2007; Caliendo and Uhlendorff 2008; Cappellari and Jenkins 2009). Recently, Rabe-Hesketh and Skrondal (2013) discussed an alternative specification of the estimator to avoid potential biases. We present robustness tests along these suggestions in Sect. 5.3 below.

  11. For contributions in the literature on welfare transitions applying the Wooldridge procedure, see Cappellari and Jenkins (2009) or Hansen and Lofstrom (2011). Erdem and Sun (2001) also apply this approach.

  12. We use the Stata program—gllamm—written by Rabe-Hesketh et al. (2004).

  13. We do not compare the probability of welfare persistence to the probability of entering welfare from employment because previously employed individuals are generally entitled to unemployment insurance benefits. Thus, they are expected to have a lower probability of entering welfare in the case of job loss.

  14. We use a parametric bootstrap approach with 1000 random draws from the sampling distribution of parameters. The procedure is available in the Stata ado-files -gllapred- and -ci_marg_mu- (Rabe-Hesketh et al. 2004; Skrondal and Rabe-Hesketh 2009).

  15. The estimation results for natives and immigrants are presented in the online appendix.

  16. For comparison, we also calculated predicted probabilities as the average of individually predicted probabilities. The results are similar in nature to those discussed and are presented in the online appendix.

  17. While the observed probabilities of welfare persistence are about 73 % for natives, the predicted probabilities are only about 6 %. Other studies report similar results. For example, Hansen and Lofstrom (2009) observe that about 66 % of natives stay on welfare in consecutive years. After controlling for initial conditions and heterogeneity, their predicted probability amounts only to about 10 %.

  18. The simulated probabilities are in Table A10 in the online appendix. The original post-reform transitions are in Table 6, panels B, D, and F.

  19. The parameter estimates for the pre- and post-reform period are available in the online appendix.

  20. Due to the small number of observations, the predicted pre- and post-reform transition patterns are not significantly different and we omit the presentation of confidence intervals.

  21. The results are available in the online appendix.

  22. The results are available upon request.

  23. Tables A11 and A12 in the online appendix show the estimation results and the corresponding transition matrices, respectively.

  24. Our finding of low relevance of state dependence differs to some extent from Königs (2014) who reports substantial state dependence in social assistance receipt in Germany. The different findings may be explained by differences in the studies’ empirical approaches. Importantly, Königs (2014) uses a considerably broader definition of the dependent variable, as his analysis includes the receipt of housing benefits. Therefore, differences in state dependence in his and our outcomes may reflect the difference in state dependence of housing benefits versus welfare. Furthermore, Königs (2014) includes individuals who are not capable of working. Presumably, these individuals have different transition patterns compared to able-bodied individuals on whom we focus.

  25. Jahn and Stephan (2012) show that about 18 % of those who became unemployed in 2010 moved directly into UB II instead of UB I. Koller and Rudolph (2011) describe that welfare exit after the Hartz Reforms generated unstable employment situations, as only 55 % of the new jobs last longer than 6 months.

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Authors and Affiliations

  1. University of Erlangen-Nürnberg, Lange Gasse 20, 90403, Nuremberg, Germany

    Regina T. Riphahn

  2. University of Halle-Wittenberg, Große Steinstraße 73, 06099, Halle, Germany

    Christoph Wunder

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  1. Regina T. Riphahn
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Correspondence to Regina T. Riphahn.

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Riphahn, R.T., Wunder, C. State dependence in welfare receipt: transitions before and after a reform. Empir Econ 50, 1303–1329 (2016). https://doi.org/10.1007/s00181-015-0977-0

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