Welfare to Work in Germany - A Proposal on How to Promote Employment and Growth

This study has been prepared at the Ifo Institute for Economic Research in the Department of Social Policy and Labour Markets. It was completed in May 2002 and has, since then, influenced the public debate in Germany on labour market reform. The study investigates the reasons for high-level unemployment in Germany, specifically among the low-skilled. As welfare benefits appear to play a major role in explaining the long-term upward trend in unemployment, a proposal is developed on how to redesign current welfare programmes in order to activate individuals who are able to work but, under the existing framework, cannot find a job. The strategy suggested combines a reduction in benefit entitlements for those who refuse to take up work, a tax credit for those who enter the low-wage segment of the labour market, and the provision of community service jobs that are mainly needed as a temporary substitute for regular employment. The proposal is supported by surveying the international experience and making extensive quantifications with respect to the impact on wages, labour demand, employment and public budgets.