Reduction of Unemployment Benefit Entitlement Length for Older Unemployed Was Avoided Before Reform Became Effective in 2006

In the three months before the reduction of the maximum entitlement length of unemployment benefits for older unemployed became effective in February 2006, the number of unemployed people sometimes doubled. This is the finding of a study published today, which was conducted by the Institute for Employment Research (IAB), the Centre for European Economic Research (ZEW) and the University of Nottingham.

In February 2006, the maximum entitlement length for unemployment benefits for older unemployed was cut back from 32 to 18 months. This change affected everybody older than 45 years who was made redundant after January 31, 2006. For people over 57, the entitlement length even reduced by 14 months. In the affected age group, the number of unemployed people who had been made redundant during the three months before the reform became effective increased by 120 percent for people between 57 and 64.

Until the end of 2007, after the reform had become effective, older employees became unemployed less often. The probability of unemployment was 20 percent less for people between 57 and 64 than it was before the reform. The positive development of the economy in 2006 and 2007 was already taken into account.

According to labour market researchers, the fact that redundancies were made in the months before the reform was responsible for the small number of new older unemployed in the time after the reform had become effective. The German government increased the maximum entitlement length again at the beginning of 2008. Therefore, no statements about the reform’s exact long-term effect can be made.

Compared to the time before the reform, the Federal Employment Agency would have saved more than € 3.5m every year by means of a reduced entitlement length. This would have been the case if the reform had not been reversed in parts in 2008. The calculations disregard the extra costs which would have been the consequence of the reform for other authorities, e.g. the unemployment benefit Hartz IV.

The Federal Employment Agency would have saved up to another half a million euro if the reform had lead to less older unemployed. However, the researchers admit that statements about the effect’s extent could not be made.

The study’s authors stress that the issue of how the actual conditions of unemployment insurance should be set was a normative question which had to be decided in politics. From an economic perspective, shorter entitlement length would be advisable. Contrary to that, the social security of unemployed people is important. The latter clearly is of significance, particularly in Germany. A survey recently showed that only 18 percent of the German population was in favour of reducing the unemployment benefits.

For further information please contact

Dr. Stephan Dlugosz, Phone: +49/621/1235-283, E-mail: dlugosz@zew.de