ZEW President Franz on Unemployment Benefits

This article appeared in the May 2005 edition of the ZEWnews.

Unemployment Benefits

By combining the social security programme with unemployment assistance into one single, long-term unemployment benefit scheme (ALG II), the federal government has recognized a need and implemented a far-reaching and bold reform despite the justified criticism regarding several details of the reform. This achievement deserves recognition and it would be advisable to let the measures take their full effect before we analyse which aspects of the reform are in need of revision. It is remarkable that there are critics who had nothing constructive to say before the reform, but knew right after the introduction of the ALG II that it was doomed to fail.

There are three issues which will have to be subjected to careful investigation within the next few months. First, the well-known problem between the Federal Employment Agency and local administrations, the so-called “shunting yards”, by which the financial burden is shifted from one security agency to another, still seems to be a major issue. The current wrangling over benefit recipients’ actual and supposed ability to work is proof to this development. While those who are fit for work receive ALG II from the Federal Employment Agency, the responsibility for welfare recipients, or people in need of support, who are not capable of working falls to municipal authorities. Quite apart from the undignified manner with which the public debate involving several accounts of individual tragedies has been conducted, there is an urgent need to establish more clarity and legal certainty with regard to this issue.

Second, the implications of improving the opportunities for ALG II recipients to earn additional income need to be investigated. There are still many cases of high transfer withdrawal rates, which should be corrected. This being the case, there is no question that rewarding those who take up employment and discouraging inactivity should remain the general objective. The question of whether we can still ensure incentives to work when large sums of money are being deducted from earned income is a different issue altogether.    Solving this issue comes, however, at a considerable cost and – this is the real problem of this plan – does not necessarily translate into better results when it comes to so-called mini-jobs, as long as we do not know in which ways this form of marginal employment is replacing regular jobs subject to social insurance contributions.

Third, the developments regarding the “working opportunities” that include “additional expenses compensation” ranging from one to two euros per hour must be subject to further observation. This so-called “additional expenses compensation” must be exactly that: a cost compensation, and should not lead to a situation in which taking up work on the labour market does not make economic sense due to the prevailing low wage level. According to calculations conducted by the German Council of Economic Experts, a married couple with a child has to earn almost 1,600 euros on the regular labour market in order to have the same net income as a worker engaged in such a “working opportunity” (30 hours a week, 2 euros per hour). Despite this justifiable unease with regard to working opportunities, especially in light of potential crowding-out effects, there is one function which should not be overlooked. When it comes to cutting benefit payments for people who are unemployed but capable of work in order to create work incentives, it is necessary to test the willingness to work of those claiming that they have been unable to find a job. Paying out significantly reduced benefits to the unemployed can only be justified if they are in fact unwilling to work. The only effective test is to look at the supply of jobs – preferably, of course, by monitoring the regular labour market or if that fails, working opportunities, even if this might be a questionable approach from the point of view of regulatory policy.

Prof. Dr. Dr. h.c. mult. Wolfgang Franz President of the Mannheim Centre for European Economic Research (ZEW)