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

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. --

Minijob-Reform: No Effect on Unemployment, Losses in Income Tax and Social Security Contributions

The so-called 'Minijob-reform', that was introduced in April 2003 as part of the 'Hartz II'-reform, was intended to increase work incentives for people with low wages and thereby reduce structural unemployment. Therefore, the hours restriction of 15 hours per week was abolished and the threshold up to which earnings remain free of social security contributions (SSC) was increased. We calculate the labor market effects and the effects on income tax and SSC on the basis of a micro simulation model. The analysis also includes indirect effects on total income tax and SSC resulting from the labor market effects of the reform. These effects consist of both, the effects from people not employed before the reform and the effects from people who were already working before the reform and whose labor supply reactions mostly remain disregarded in the political debate. The estimations show that the 'Minijob-reform' led to a small increase in the number of people in marginal employment. The effects on employment in secondary jobs and the potential legalization of illicit work are, however, not taken into account in this analysis. Persons who have already been working before the reform reduce their working hours. This leads to a small decrease in total working hours throughout the population.

Benefit-Entitlement Effects and the Duration of Unemployment: An Ex-ante Evaluation of Recent Labour Market Reforms in Germany

Abstract: We analyse benefit-entitlement effects and the likely impact of the recent reform of the unemployment compensation system on the duration of unemployment in Germany on the basis of a flexible discrete-time hazard rate model estimated on pre-reform data from the German Socioeconomic Panel (SOEP). We find (i) relatively strong benefit-entitlement effects for the unemployed who are eligible to means-tested unemployment assistance after the exhaustion of unemployment benefit, but not for those without such entitlement; (ii) non-monotonic benefit-entitlement effects on hazard rates with pronounce spikes around the month of benefit-exhaustion, and (iii) relatively small marginal effects of the amount of unemployment compensation on the duration of unemployment. Our simulation results show that the recent labour market reform is unlikely to have a major impact on the average duration of unemployment in the population as a whole, but will significantly reduce the level of long-term unemployment among older workers.unemployment duration, unemployment insurance, benefit-entitlement effects, German labour market reforms, ex-ante evaluation, hazard rate model