Understanding the Persistence and Duration of Benefit Receipt

This blog is based on article in the Journal of Social Policy. Click here to access the article. 

In many advanced welfare states, welfare recipients often receive benefits continuously or repeatedly. Long-term unemployment and welfare receipt can have detrimental effects for the individual and the society as a whole. Furthermore, the chances of leaving welfare decreases with the duration of receipt. Thus in most European countries, fighting long-term unemployment and long-term benefit receipt has been a major policy challenge recent years.

Although the German economy managed comparatively well through the last great economic recession, it suffers from a high and stagnating incidence of long-term unemployment and long-term benefit receipt. The robustness of the German labour market during the crisis is at least partly ascribed to the Hartz reforms in the early 2000s. They introduced a new means-tested welfare benefit (unemployment benefit II) for individuals who are capable of working and their households. The welfare benefit aims at securing a minimum standard of living. Furthermore, the reforms aimed to activate welfare recipients and strengthen their personal responsibility, with the primary goal of labour market integration. All benefit recipients have access to measures of support and are required to reduce or end benefit receipt through employment.

Eligibility for welfare benefits is not conditional on individual unemployment, but on the household’s inability to meet its needs. The broad eligibility criteria implies a heterogeneous group of recipients.  Welfare recipients do not have to be registered as unemployed but can also be employed, inactive or participating in education or active labour market programmes. Therefore, they also include single parents, low-wage earners or people with poor health.

Our paper is the first to study the determinants of welfare benefit receipt including the previous duration of welfare receipt in Germany. In line with previous international evidence, we find that demographic characteristics and individual labour market resources are important for leaving welfare.

Individuals with children, particularly single parents, leave welfare receipt more slowly than those without. This result might be due to a higher income threshold to leave benefit receipt as well as time constraints because of childcare responsibilities. Furthermore, the chances of leaving welfare decrease with age, with particularly low exit rates for benefit recipients aged over 55.

Individuals with more labour market resources (i.e. higher education and more labour market experience) leave welfare receipt faster than others do. Moreover, the duration on welfare reduces the chances of leaving welfare and unobserved individual characteristics (e.g. abilities not captured by formal qualifications) are relevant.

As one main contribution, our study analyses leaving benefit receipt and leaving unemployment as two different processes. The two processes differ considerably: individuals on average leave unemployment faster than welfare receipt. Taking up employment is not necessarily sufficient to exit benefit receipt, since the income and the household composition are also relevant. Unobserved individual characteristics that affect the chances to take up employment seem to be more important for the process of leaving unemployment than welfare receipt. Duration effects are also stronger for the process of leaving unemployment than leaving welfare receipt: the effects of a long unemployment duration on the exit rate are larger than the ones for most important observable characteristics.

Considering these results, we propose the following policy recommendations. First, welfare recipients who are better equipped with labour market resources leave unemployment and welfare receipt faster than welfare recipients with fewer labour market resources do. Therefore, policies should target employment obstacles and support welfare recipients to improve or adapt their skills. As age is one of the strongest obstacles for leaving unemployment and welfare receipt, policies should particularly target welfare recipients in older age groups: for example, by health support measures.

Second, previous welfare duration decreases the chances of leaving welfare. Thus, policies should intervene early to prevent long-term benefit receipt and long-term unemployment.

Third, due to the benefit design, recipients groups are heterogeneous. Special support is needed for couples with children and even more so for single parents. Here, policies that improve the possibilities to reconcile work and family should accompany labour market policies.

Fourth, as leaving unemployment and leaving welfare receipt are two distinct processes, fighting unemployment alone is insufficient. Labour market policy programmes should not only aim to end individual unemployment but also to enable qualified employment with reasonable wages. Investment in human capital should accompany activation policies. In addition, measures should contribute to stabilising employment and preventing fast returns to unemployment. A combination of these programmes can improve the long-term financial situation of a household. Accordingly, our policy recommendations are substantially linked to the specifics of the German benefit system: its broad eligibility criteria, high incidence and heterogeneous recipients groups necessitate a variety of programmes that target specific groups with specific problems and focus on either one or both processes of benefit receipt and unemployment. This poses major challenges for case workers. A system with sufficient time, resources and discretion for caseworkers to assist benefit recipients seems preferable to a fragmented system with different benefits and respective institutions.

Further research on the determinants of benefit receipt is needed and should investigate more closely the routes that take welfare recipients out of benefit receipt and the related sustainability of these exits.


About the authors

Katrin Hohmeyer is a researcher at the Institute for Employment Research in Nuremberg.

Torsten Lietzmann is a researcher at the Institute for Employment Research in Nuremberg.

 

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