New Insights into Unemployment Duration and Post Unemployment Earnings in Germany*
| DOI | http://doi.org/10.1111/j.1468-0084.2010.00597.x |
| Author | Bernd Fitzenberger,Ralf A. Wilke |
| Published date | 01 December 2010 |
| Date | 01 December 2010 |
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©Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2010. Published by Blackwell Publishing Ltd,
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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 72, 6 (2010) 0305-9049
doi: 10.1111/j.1468-0084.2010.00597.x
New Insights into Unemployment Duration and
Post Unemployment Earnings in GermanyÅ
Bernd Fitzenberger† and Ralf A. Wilke‡
†Department of Economics, Albert–Ludwigs University, ZEW, IZA, IFS, 79085 Freiburg,
Germany (e-mail: bernd.fitzenberger@vwl.uni-freiburg.de)
‡School of Economics, University of Nottingham, University Park,
Nottingham NG7 2RD, UK (e-mail: ralf.wilke@nottingham.ac.uk)
Abstract
Building on non-stationary search theory (Mortensen, 1977; Van den Berg, 1990), this
article estimates the effects of UB on unemployment durations and future earnings
using unique administrative data in Germany. We apply censored Box–Cox quantile
regression. Our results imply that the length of entitlement shows only a weak
effect on unemployment duration for entitlement lengths up to 12 months and no
effect on post unemployment earnings. There are noticeable effects on exits from
unemployment for entitlement lengths above 12 months. A high wage replacement
rate for low-wage earners is associated with a longer duration of unemployment and
higher post unemployment earnings.
I. Introduction
This article analyses empirically the link between the generosity of unemployment
benefits (UB), unemployment duration and post unemployment earnings in West
ÅThe authors thank two anonymous referees and the editor for helpful comments. Weare grateful to Stefan
Bender, Christina W¨ubbecke and the Employment Agency Mannheim for considerable help with the
data, Xuan Zhang for sharing the program code and Eva M¨uller for research assistance. We thank
Dragana Djurdjevic, Jenny Hunt, Stephan Klasen, Bruce Meyer, Kostas Tatsiramos, Klaus W¨alde, two
anonymous reviewers and the participants of numerous workshops and seminars for helpful comments or
discussions on the paper. The authors gratefully acknowledge financial support by the German Research
Foundation (DFG) through the research projects Microeconometric modelling of unemployment duration
under consideration of the macroeconomic situation and Statistical modelling of errors in administrative
labor market data which were carried out at the ZEW Mannheim. This work uses the IAB employment
subsample 1975–2001 with anonymous and original variables. The delivery and use of the data are in
compliance with §75 SGB X. The IAB does not take any responsibility for the use of its data.
JEL Classification numbers: C13, C14, J64.
Unemployment duration and post unemployment earnings 795
Germany during the late 1990s. This is the first article to use censored Box–Cox
quantile regression for the analysis of unemployment duration. Income support for
the unemployed in Germany comes from three sources. During the benefit entitle-
ment period, which depends on the length of previous employment, the unemployed
are entitled to benefits as a function of their previous earnings. Afterwards, the un-
employed may receive the lower, means-tested unemployment assistance (UA). In
addition to receiving UB or UA, an unemployed may receive supplementary, means-
tested social benefits (SB). Weuse more comprehensive administrative data from the
unemployment insurance records than previous studies about Germany as we have
access to the actual level of UB, UA and the length of benefit entitlement periods.
Changes in benefit levels over the course of an unemployment spell are a feature
of all unemployment insurance systems around the world.1Hence, our analysis for
Germany should be of broader interest.
There already exists a large body of literature on the effects of UB on the dura-
tion of search unemployment.2Meyer (2002) and OECD (2003) provide surveys on
the effects of UB on the duration of unemployment. Empirical studies for the USA
find significantly positive elasticities of unemployment duration with respect to the
potential duration of benefits. Meyer (1990) uses institutional changes as a natu-
ral experiment to identify the effect of changes in unemployment insurance on un-
employment duration in a hazards rate model. The study finds that an increase in
the entitlement period by 1 week results in an increase in unemployment duration
by 0.1–0.2 weeks. Narendranathan, Nickell and Stern (1985) estimate a proportional
hazards rate model with time-varying benefit levels and time-varying coefficients for
the UK. The authors find a positive elasticity of unemployment duration for men
with respect to the level of UB but no impact for the long-term unemployed. On
the basis of a non-stationary job search model, Van den Berg (1990) estimates a
structural search model with time-varying benefits and a time-invariant wage offer
distribution for the Netherlands. The study shows that the size of benefits after 2
years, when transfers were reduced to the level of SB, affects hazards rates con-
siderably more than the benefit level during the first 2 years. Van Ours and Vodo-
pivec (2006a,b) provide quasi-experimental evidence for Slovenia that a reduction in
benefit entitlement periods strongly increases job finding rates, whereas the quality
of the post unemployment jobs remains unaffected. By contrast, on the basis of the
European Community Household Panel for eight countries, Tatsiramos (2006) finds
that there is a positive indirect effect of UB on subsequent employment duration.
This effect is pronounced in countries with relatively generous benefit systems like
Germany. Centeno and Novo (2006, 2007a,b) use quantile regression techniques to
analyse the impact of the generosity of UB on unemployment duration in Portugal and
the quality of subsequent jobs both for the USA and Portugal. For the USA, Centeno
1See the surveys Meyer (2002) and OECD (2003) as well as the analysis of Van den Berg(1990) for the
Netherlands in the 1980s, where the institutional set-up was fairly similar to that of Germany in the 1990s.
2We focus on unemployed who are still likely to look for new jobs. In Germany, it is likely that a sizeable
group of benefit recipients are actually not searching (Fitzenberger and Wilke, 2010).
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2010
796 Bulletin
and Novo (2006) find that a higher generosity increases both the expected value and
variance of wages and tenure in the subsequent job. The results for Portugal in Centeno
and Novo (2006, 2007a,b) imply that an increase in the entitlement period results in
longer durations (and a higher variance of durations) as well as slightly higher wages
(and a higher variance of wages).
The literature for Germany provides conflicting evidence: while some studies find
a positive relationship between the length of UB entitlements and unemployment
duration (Hunt, 1995; Steiner, 1997, 2001; Plassmann, 2002), the results in Fitzen-
berger and Wilke (2010) and Lee and Wilke (2009) depend upon the specific sample
or the definition of unemployment in the data. There are also studies which do not find
any effect (Schneider and Hujer, 1997; Decressin, 2001). Using a proportional haz-
ards model estimated based on the German Socioeconomic Panel (GSOEP),3Hunt
(1995) analyses the effects of the extension of benefit entitlement periods for older
workers during the 1980s on the hazards rates from unemployment using a difference-
in-differences estimator based on interaction effects between age groups and time.
The analysis finds some significant positive effects of potential duration of benefits
in Germany on the actual duration of unemployment, but the standard errors of the
estimated effects of benefit durations are fairly high. Decressin (2001) reanalyses
the benefit extensions in the 1980s. She estimates a proportional hazards model for
GSOEP data. She finds no systematic effect of the changes in benefit duration on the
duration of unemployment. For older workers above the age of 49, the extension of
benefit entitlement periods was associated with a strong increase in early retirement
(this issue is already discussed by Hunt, 1995). On the basis of larger administra-
tive data, Fitzenberger and Wilke (2010) conclude that in fact the actual duration
until a job is found was not strongly affected by the extensions of potential benefit
duration for older workers. The conflicting evidence based on the GSOEP might
be due to a number of data problems, such as small sample sizes (Hunt, 1995;
Decressin, 2001), heaping effects (Steiner, 1997) and recollection error (J¨urges,
2005). There exists a smaller body of literature on the relationship between UB on
post unemployment earnings in Germany. Using the GSOEP, Gangl (2002) finds
positive effects of longer entitlement periods for UB on the quality of subsequent
jobs regarding the wage level and the stability of employment (see also Tatsiramos,
2006). Using administrative data, Fitzenberger and Wilke (2010) find no such earn-
ings effects in response to the changes in benefit durations over time.
Although not stated explicitly in some cases, a large part of the empirical
literature (including all the aforementioned studies for Germany) bases the reduced
form analysis of the duration of unemployment and post unemployment outcomes
on a stationary search model with ad hoc extensions to account for non-stationarities
(e.g. Moffitt, 1985; Narendranathan et al., 1985; Steiner, 1997, 2001). A prime
case to study is the effect of an anticipated reduction in benefits at a certain point
during an unemployment spell (e.g. when benefits are exhausted after a certain
3Kaiser and Siedler (2001) provide comparative evidence for Germany and the UK based on the GSOEP
and the British Household Panel Survey.
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2010
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