Fixing the Leak : Unemployment Incidence Before and After the 2006 Reform of Unemployment Benefits in Germany

The law on labour market reforms has severely limited the maximum benefit period for the elderly; with cuts of up to 14 months, depending on the age group. Our paper examines this natural experiment and shows that for the age groups in question, the transition rates from employment to unemployment rose significantly in the three months prior to the reform. For the average employee in the age group 57 to 64 years, the monthly probability of transition was approx. 120 percent higher than had been expected without reform. In the postreform time period up to 2007, the monthly entry rates of elderly persons into unemployment fell significantly; among the 57 to 64-yearolds they were well over 20 percent lower than without the reform. A considerable share of the low entries in the post-reform time period is most likely due to the fact that transitions were included as part of the months before the reform. Since maximum benefit periods have partly been extended at the beginning of 2008, it was unfortunately not possible to identify the exact long-term effect of the reform. A cautious assessment of the effects of the financial reform nevertheless shows an annual cost-saving potential for unemployment insurance of 3.66 to 4.22 billion euros, compared to the pre-reform period. This amount corresponds to approx. 13 to 15 percent of the unemployment benefit expenditures in 2004. The reform thus played a significant role in subsequent reductions of unemployment insurance contributions