This blog is based on an article in the Journal of International and Comparative Social Policy. Click here to access the article.
In Germany, but also in other countries, coronavirus has stopped long-term economic growth and prosperity gains that followed the Great Recession after 2008. The virus suddenly brings the topic of unemployment back to broad public attention. Depending on national employment protection legislation and ad hoc policy measures to counter the crisis, unemployment rates are starting to rise at varying speed. While in Germany so far, short-time work schemes limit the damage, the US has already lost all its employment gains of the last decade, and every week, people file millions of new requests for unemployment benefits.
Unemployment causes all sorts of cost, not least fiscal. In the context of an emerging discussion on what countries will be able to do for their citizens’ welfare and for how long, we can expect a renaissance of the discussion on possible unwanted behavioural side-effects of welfare state activity. If unemployment remains high while public budgets go deeper into deficit, we may again be discussing the “right incentives” for benefit recipients to take up a job.
The right extent of social spending has always been a topic of controversy. We distinguish three different views:
1) The neo-liberal ‘making work pay’ perspective sees the benefit recipient as a homo economicus who weighs the loss of leisure time against additional income earned through work. If social benefits are high, he or she should be less interested in working (more hours) and should be pickier in choosing a job.
2) A more conservative, but still critical view, that assumes that exits from unemployment depend mainly on personal effort. It warns that ‘generous’ benefits allow a ‘dependency culture’ to emerge, i.e. a ‘normal’ way of life that does not include work and self-responsibility.
3) Against this, the ‘welfare resources’ perspective assumes that people do not generally want to be idle, and highlights the value of social benefits as a resource for the job-seeker to maintain his or her search for an adequate job. Searching longer, or retraining in the meantime, can lead to better and more productive work. Generous social benefits can thus also benefit society at large. While these three views are divided as far as their explanations and policy recommendations are concerned, they concur in that larger benefits should prolong unemployment spells.
Against this prediction, the outcome of our recent study on the effects of ‘generous’ social benefits on employment take-up is that if such an effect exists, it is very small. We sought to explain shifts in (quasi-)jobless households’ work intensity (the share of household members’ time dedicated to paid work) in relation to the level of social benefits that households received. To this end, we observed thousands of households in different European countries over two consecutive years in the period between 2006 and 2014, drawing on survey data provided by the EU (EU-SILC).
We indeed found the ‘generosity’ of social benefits to be negatively connected to the speed at which households increase their work intensity: (quasi-)jobless households that received higher benefits were slower to return to employment – yet only slightly. According to our findings even a substantial boost of social benefits would hardly slow down the increase of households’ work intensity between two consecutive years. It seems that most people take up employment or remain unemployed independently of benefit ‘generosity’. This may be due to the fact that getting a job always requires not just the desire to work, but also favourable circumstances like adequate childcare arrangements and, above all, a job offer.
It is worth re-considering our topic under the specific circumstances of a coronavirus recession or even depression. The Corona crisis came unexpectedly; few people saw the pandemic coming, and even when the virus became known, few expected it to severely affect countries in Europe.
But when it did, it hit citizens extremely unequally; it affected and is still affecting workers differently according to their branch of activity and employment status. Many workers were, or are still, legally prohibited to work and many lost their jobs or self-owned businesses. But even once legal limitations to economic activity are permanently lifted, we do not know how long it will take to get people back into employment: With interrupted supply chains, looming trade wars, and possible credit shortages on the supply side, and prudent or financially strained customers on the demand side of the economy, a long-lasting dry spell may be in store. During such a situation, the partly technical question of setting the right incentives for job-seekers steps back behind the question of equity: how could it be justified to activate the unemployed if job-losses were unforeseeable and random, and new jobs remain unavailable for the time being?
Economic crises are a test for the welfare state. In my country, Germany, the coming years could bring the first long-lasting recession under the rules introduced by the so-called Hartz-reforms of the mid-2000s. At that time, Germany was known as the “sick man of Europe”, and one of the reasons for high unemployment was linked to the perceived unwillingness of job-seekers to work in service-oriented sectors that have employment conditions below the ones known from industrial sectors.
This led to a two-tiered social security system, at the bottom part of which the idea of activating the unemployed has a central place. This reformed German welfare state has been used as one of the main explanations for the “miracle” of the German labour market after the 2008 crisis; an argument that has, however, been challenged by alternative explanations like demographics. Like in the last crisis, the German social security system is now meeting a reality different from the one it has been designed for. But this time, the downturn may not be so short-lived; we will have more time to contemplate the social injustice which this mismatch causes. It is not least for the sake of social cohesion that we should hope for a quick recovery.
About the author