In Germany, unemployment has been increasing since the 1970s. This development has particularly affected the unskilled. At present, almost 40 percent of the unemployed are without formal qualification, which is far more than the share of the low-qualified in the population. While skill biased technological change seems to be reducing demand for low-skilled labor worldwide, wages in Germany are too rigid downward at the bottom end, to absorb the adverse employment impact of this process on the low-skilled (Steiner/Mohr, 2000).
One explanation for lack of flexibility in the low-wage sector of the German labor market comes from provision of subsistence payments to the unemployed, generous by an international standard, in conjunction with high marginal transfer reduction rates on small labor earnings. To give an example, the weekly net income of a fill-time working single without children who receives a gross wage of 7 Euros per hour, exceeds her claim on welfare benefits by only about 60 Euros. This comparison does not even consider any costs of working.
In order to overcome the labor supply disincentives of the German welfare state, reformers either could choose to cut effective benefits received in unemployment, or to increase households‘ in-work income. Decision makers mostly seem to prefer the latter. Several concepts to lower marginal transfer reduction rates or giving subsidies to low-wage earners have been proposed, and sometimes implemented on an experimental basis. Recently, policies to reduce payroll contributions to social insurance at the lower income range have become popular.
In this paper, we seek to evaluate the impact of different concepts to support low-qualified job seekers through subsidizing social insurance contributions, namely of what might be labeled the Mainzer, Stoiber and NRW models. The latter two, proposed by conservatives and social democrats, respectively, employ subsidy schemes based on individual earnings. In contrast, subsidies in the Mainzer model derive from the joint income of husbands and wives. To adequately capture the labor market effects of such an incentive scheme, we employ a model of joint household decision making, which is estimated on the basis of data taken from the German Socio Economic Panel.
The remainder of the paper is organized as follows. The next section explains our structural discrete choice model of household labor supply, and discusses the data and estimation results. In section 3, the labor market effects of the different subsidy concepts are simulated on the basis of the estimated parameters. Section 4 concludes.
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