What is the use of a wages top-up? : an econometric analysis of the labour supply reactions of social assistance recipients and the fiscal effects for social assistance agencies

Abstract

"At present it is hardly worthwhile for social assistance recipients to take up employment. The earned income is deducted almost entirely from the social assistance benefits, with the result that any possible increases in the available income are relatively small. The existing social assistance regulation consequently contains hardly any incentives to work and is often criticised in this respect. Various reform approaches therefore propose a reduction in the rate of deduction. In this way it is possible - following the concept of negative income tax - to achieve an increase in available income and thus boost the attractiveness of taking up work. One of the reform approaches was brought into the debate by the Federal Ministry for Health (BMG). The wages top-up proposed in this favours in particular households with children and employment subject to social security payments. The consequences of this proposal for the labour market and the social assistance agencies are determined taking as an example the state of Saxony-Anhalt. The expected labour supply reactions of social assistance recipients is estimated with the aid of a TOBIT model and on the basis of data from the labour market monitor for Saxony-Anhalt. From this it is possible to determine the expected fiscal consequences for the social assistance agencies. In this respect it is necessary to consider the groups of unemployed and employed social assistance recipients as well as the potential new entrants to the social assistance scheme. The expansion of the labour supply associated with the reform is rather small in quantitative terms. Only 2.4 % of the unemployed social assistance recipients are expected to take up a job. That is also where the savings effects of the reform proposal arise, provided that no restrictions occur in the capacity of the labour market to absorb these individuals. The analysis shows that by extending the limits of what can be earned in addition to social assistance considerable additional expenditure is caused as a result of deadweight effects which on the whole might exceed the savings." (Author's abstract, IAB-Doku) ((en))

Cite article

Dreger, C., Kempe, W., Kolb, J. & Trabert, L. (1998): Was bringt ein Kombilohn? Eine ökonometrische Analyse der Arbeitsangebotsreaktionen von Sozialhilfeempfängern und der fiskalischen Effekte für Sozialhilfeträger. In: Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, Vol. 31, No. 4, p. 705-714.