Performance of Active Labour Market Policy in Germany
21
Wage Subsidies to Employers
The challenge of controlling adequately for self selection is especially difficult
in the context of integration subsidies. Here, selection into treatment does not
only depend on the characteristics of the participant, but also on character-
istics of the potential employer who will receive the subsidy. The case worker,
moreover, has a wide scope of discretion for determining whether the charac-
teristics of employer and employee jointly satisfy the criteria required for the
subsidy. There are only two studies on the effects of integration subsidies
before Hartz. Jaenichen (2002) collects administrative data from selected
Federal Employment Agency districts throughout Germany covering the
period 1999-2001. She finds that participating in integration subsidy
programmes significantly reduces the probability of a worker to be registered
as unemployed. In the long run, when the subsidy usually expired, the effect is
still positive, although significant only in East Germany. Hujer et al. (2004b)
use firm data to examine whether employing subsidized workers affects the
employment development of firms. Based on the IAB establishment panel
data covering the years 1995-1999 they cannot find any significant effects.
The Hartz reform provided the opportunity to circumvent the selection
problems that have been outlined above, by changing the eligibility conditions
for integration subsidies. The study by ZEW/IAB/IAT (2005) uses adminis-
trative data of the years 2000 to 2003 and exploits the fact that since the be-
ginning of 2002 older unemployed workers do no longer need to satisfy the
condition of being long-term unemployed in order to be eligible for inte-
gration subsidies. The effect of wage subsidies on the employment prospects of
older workers is assessed using a Difference-in-Differences estimator. The
results indicate that integration subsidies increase the probability to be em-
ployed 6 months after entering unemployment by 2 percentage points. These
effects seem to stem from significant positive effects in East Germany only,
while in West Germany the effects are insignificant. Within the target group
the number of windfall beneficiaries seems to be low. The longer term effects
of integration subsidies on the probability of being employed after the subsidy
ends is assessed using propensity score matching. The results suggest that, de-
pending on type, length and target group of the subsidy, this probability is 20 to
50 percentage points higher for the treatment than the for the comparison
group. However, there are some indications of windfall gains.
Start-up Subsidies
Only little empirical evidence exists on the effectiveness of the “bridging al-
lowance” start-up subsidy for the unemployed. The study by Pfeiffer/Reize
(2000) compares firm survival and employment growth of start-ups by unem-
ployed persons receiving bridging allowance and other, regular start-ups,
based on firm data from 15 regions in East and West Germany. The results in-