labour markets exceed administrative boundaries of counties we include not only the stock
of short- and long-term unemployed workers and the number of newly available vacancies in
region i but also in the respective neighbouring regions ni. Xi is a vector of variables
controlling for regional characteristics like urbanisation, a dummy variable for East Germany
and the natural log of the population size in region i.
The OLS estimate of the indicator variable Ii in the first column of Table 3 shows a
negative correlation between regions with Approved Local Providers and the unemployment
to employment transition rate of long-term unemployed. Although the OLS estimates for the
indicator variable Ii indicate a negative relationship between Approved Local Providers and
the job finding rate, it remains unclear whether being cared for by an Approved Local
Provider has a causal negative impact on the job finding rate. In fact, OLS estimation is only
able to identify the effect of being an Approved Local Provider on the job finding rate if the
error term εi has a zero mean conditional on all covariates. In other words, only if the
indicator variable Ii for being an Approved Local Provider is not correlated with any
unobserved characteristic that influences the job finding probability, then the OLS estimates
are unbiased. However, given the evidence of positive self-selection in section 3 it is
unlikely that the OLS estimate is unbiased. Since regions that later chose to become
Approved Local Providers performed better, i.e., had significantly lower social assistance
recipient rates prior to the Hartz IV reform than regions that later became Joint Local
Agencies, we expect the OLS estimate to be upward biased. Thus, the negative coefficient of
the OLS estimate in the presence of positive self-selection indicates that being an Approved
Local Provider has no positive influence on the job finding rate of long-term unemployed.
To overcome the potential bias of the indicator variable Ii on ln yi we use an instrumental
variable approach. As an instrument we use a variable that indicates whether the mayor of a
region was a board member or a State president of the German County Association
(“Deutscher Landkreistag”) in 2004, the year when regions had to apply to become an
Approved Local Provider. The German County Association6 is the federal association of
German counties and its main tasks are to promote local government self-administration
(which is guaranteed by the German Constitution) and to foster common interests between
all local government bodies vis-à-vis the Federal State and the single States. It is financed
through contributions made by all counties.
As a lobbying institution, it tries to influence Federal and State level legislation that
affects municipalities and counties in the interest of all counties. The German County
Association exerts its main influence on regions by providing information on municipality or
county relevant issues through its journal “Der Landkreis” or by providing counties a
6 For more information (in German) see: http://www.kreise.de/__cms1/dlt-portrait.html
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