Employment and Wage Effects of Social Security Financing: An Empirical Analysis of the West German Experience and some Policy Simulations

This paper follows up recent work on the relationship between (un?)employment and wage effects of social security financing undertaken by the OECD Jobs Study. Based on a simple macroeconometric model of the labour market, I investigate whether the peculiar OECD results for Germany on the incidence of social security contributions and taxes also hold up within a somewhat different model. The study also provides some policy simulations to answer the topical question whether increasing indirect taxes to finance a reduction of the contribution rates to social security levied on employees and employers in Germany. The main result of the paper is that there is in fact a positive short?run employment effect of a revenue neutral switch of financing social security expenditures by increasing indirect taxes and reducing employers' contribution rates, but in the longer?term only modest effects remain due to higher wages. --

Long-term unemployment during the transition to a market economy: Eastern Germany after unification

Long-term unemployment in Eastern Germany in the two-years period since Currency, Economic and Social Union is analyzed by means of a discrete hazard rate model of individual re-employment behaviour estimated on the first three waves of the German Socio-Economic Panel. Although most unemployment spells end in employment within a few months, long-term unemployment has already become an important phenomenon of the transition process in Eastern German. While for prime-aged married males long-term unemployment is of little importance, its incidence is particularly high among older workers and married females, especially those with small children. There is strong evidence for duration and occurrence dependence effects in the unemployment process: the hazard rate from unemployment into employment declines sharply after the first few months and stabilizes at a relatively low level, while the experience of previous unemployment reduces an individual's future re-employment probability significantly. --

Labour market transitions and the persistence of unemployment: West Germany 1983 - 1992

Although explanations of the persistence of high unemployment in Germany, in particular long-term unemployment, have increasingly focused on structural factors, there is only very limited evidence on their empirical importance so far. In this paper, these factors are analyzed based on a microeconometric model of individual transitions from unemployment into employment and non-participation for the West German labour market. The empirical analysis is based on waves 1 - 9 of the Socio-Economic Panel for West Germany covering the period 1983 to 1992. The focus of the study is on the importance of 'negative duration dependence' arising from causal factors and 'sorting' effects due to unobserved heterogeneity in the unemployment pool. I also sort out the relative contribution of various factors, such as individual characteristics, the state of the labour market, and the effects of unemployment benefits on long-term unemployment. --

Has earnings inequality in Germany changed in the 1980's?

The development of the West German earnings distribution in the 1980's is analysed on the basis of both the German Socio-Economic Panel and micro-data from the Employment Register of the Federal Labour Office. We find that earnings inequality in Germany has increased very little in the 1980's, if at all. It is shown ·that the marked increase in earnings inequality found in previous studies based on the register data is a statistical artifact related to a change in the coding of the earnings data. Our decomposition analysis based on estimated earnings functions reveals that the relative stability of the German earnings distribution in the 1980's has not resulted from large compensating changes in the composition of the labour force on the one hand, and changes in the returns to human capital on the other. While both of these components have changed little in the observation period, the former rather than the latter component has contributed to the small increase in earnings inequality observed in the register data. If anything, the earnings differential between skilled and unskilled workers has become smaller during the 1980's, while within-inequality has contributed very little to changes in inequality. Overall, the empirical results of this study seem compatible with an institutional explanation of the stability of the German earnings distribution. --

Self-Employment - a Way to End Unemployment?: Empirical Evidence from German Pseudo-Panel Data

This paper contributes to the policy-relevant question whether self-employment is a way out of (long-term) unemployment. We estimate the relationship between the entry rate into self-employment and previous (long-term) unemployment on the basis of pseudo-panel data for Germany in the period 1996-2002. The estimation method accounts for cohort fixed effects and measurement errors induced by the pseudo panel structure. We find that previous (long-term) unemployment significantly increases entry rates into self-employment for both men and women. These effects are quantitatively important, both in absolute terms and compared to other potential determinants of self-employment transitions, such as age, the level of vocational qualification and certain household characteristics.self-employment, entrepreneurship, entry rate, start-ups, unemployment, pseudo-panel, age and cohort effects

Returns to education across Europe: A comparative analysis for selected EU countries

Incentives to invest in higher education are affected by both the direct wage effect of human capital investments and the indirect wage effect resulting from lower unemployment risks and shorter spells in unemployment associated with higher educated. We analyse the returns to education in Austria, Germany, Italy, Sweden and the United Kingdom, countries which differ significantly regarding both their education systems and labour market structure. We estimate augmented Mincerian wage equations accounting for the effects of unemployment on individual wages using EU-SILC data. Across countries we find a high variation of the effect of education on unemployment duration. Overall, the returns to education are estimated to be the highest in the UK, and the lowest for Sweden. A wage decrease due to time spent in unemployment results in a decline in the hourly wages in Austria, Germany and Italy. --Returns to education,unemployment,EU-SILC

Public Pensions, Changing Employment Patterns, and the Impact of Pension Reforms across Birth Cohorts: A Microsimulation Analysis for Germany

We analyze the impact of changing employment patterns and pension reforms on the future level of public pensions across birth cohorts in Germany. The analysis is based on a rich dataset that combines household survey data from the German Socio-Economic Panel Study (SOEP) and process-produced microdata from the German pension insurance. A microsimulation model is developed which accounts for cohort effects in individual employment and unemployment and earnings over the lifecycle as well as the differential impact of recent pension reforms. Cohort effects for individuals born between 1937 and 1971 vary greatly by region, gender and education and strongly affect lifecycle wage profiles. The largest effects can be observed for younger cohorts in East Germany and for the low educated. Using simulated life cycle employment and income profiles, we project gross future pensions across cohorts taking into account changing demographics and recent pension reforms. Simulations show that pension levels for East German men and women will fall dramatically among younger birth cohorts, not only because of policy reforms but due to higher cumulated unemployment. For West German men, the small reduction of average pension levels among younger birth cohorts is mainly driven by the impact of pension reforms, while future pension levels of West German women are increasing or stable due to rising labor market participation of younger birth cohorts.public pensions, cohort effects, microsimulation

Effective profit taxation and the elasticity of the corporate income tax base: Evidence from German corporate tax return data

We estimate the elasticity of corporate taxable income with respect to the effective corporate tax rate on the basis of a pseudo-panel constructed from corporate tax return micro data for the period 1998-2001, a period which saw the introduction of a major corporate tax reform in Germany. Endogeneity of the effective tax rate is controlled for by an instrumental variable approach. Our instrument for the observed effective corporate tax rate is the counterfactual effective tax rate a corporation would face in a particular period had there be no endogenous change of corporate profits. This counterfactual is obtained from a detailed microsimulation model of the corporate sector based on tax return micro data. We find a statistically significant and relatively large point estimate of the average tax base elasticity, which implies that a reduction of the statutory corporate tax rate would reduce corporate tax receipts less tha n proportionally due to income shifting activities. We also find some statistically weak evidence for the hypothesis that the tax base elasticity is higher for corporations that may benefit from various forms of tax shields. --corporate income taxation,tax base elasticity,micro simulation

Wages in the East German transition process: facts and explanations

We analyze wage developments in the East German transition process both at the macro and at the microeconomic level. At the macroeconomic level, we draw special attention to the important distinction between product and consumption wages, describe the development of various wage measures, labor productivity and unit labor costs in East Germany in relation to West Germany, and relate these developments to the system of collective wage bargaining. At the microeconomic level, we describe changes in the distribution of hourly wages between 1990 and 1997 and analyze the economic factors determining these changes by way of empirical wage functions estimated on the basis of the Socio? Economic Panel for East Germany. The paper also draws some conclusions on the likely future course of the East-West German wage convergence process. --

Relative Earnings and the Demand for Unskilled Labor in West German Manufacturing

We analyze the economic factors which have contributed to the dramatic decline of the employment share of unskilled labor in German manufacturing, in particular the role played by the relatively rigid earnings structure. Potential effects of intensified international competition and skill?biased technological change on the relative employment and earnings position of unskilled workers are also discussed. We find that the substitution elasticity between unskilled and skilled labor is rather low. The decline in the employment share of unskilled workers attributable to an inflexible earnings structure therefore seems to have been modest compared to the trend decline in the skills ratio. We also find some modest effects from international competition and technological change on the employment share of unskilled labor. --