Intensifying the Use of Benefit Sanctions – An Effective Tool to Shorten Welfare Receipt and Speed Up Transitions Employment?

During the last two decades many countries have reformed their welfare systems with the aim of shifting labor market policies from passive benefit receipt towards increased job search and work requirements. As part of this shift benefit sanctions are increasingly being used in the activation process when welfare recipients fail to comply with their duties. Benefit sanctions are a partial or complete reduction of the benefit level for a certain period of time. In Germany, sanctions have become much more commonplace after the reform of the welfare system in 2005 (the so-called ‘Hartz IV’ reform). Here, benefits are either cut by 10% or 30% depending on the severeness of the infringement. In case of repeated infringements within one year sanctions can be augmented stepwise up to a total cut of 100%. Despite the increased use of benefit cuts, the empirical literature on the effect of sanctions on the transition from welfare to work is still limited and does not provide clear policy recommendations. A major drawback of existing studies is that they mostly have to rely on limited individual information or are restricted to small geographic areas. Generalizing these findings to welfare recipients in other regions or countries is not straightforward and requires strong assumptions. In addition, relying on individual information only is questionable. It ignores the fact that the imposition of sanctions not only depends on the characteristics of a welfare recipient but also on the characteristics of the welfare agency at which the individual is registered and which is in charge of the decision whether or not a sanction is applied. Benefit sanctions are not imposed uniformly when the individual does not comply with his or her duties. Rather, there is substantial discretion at the agency level. Some agencies are quite reluctant with respect to using sanctions while others apply sanctions more frequently. Based on a unique data set, which combines individual information about welfare recipients with agency information, we use differences in sanction strategies and rates across welfare agencies to estimate the effect of a sanction on the drop-out from welfare and the uptake of employment. Precisely, we estimate the sanction effect for those individuals who are not sanctioned in an agency with a moderate sanction regime, but who will be sanctioned if the agency decides to change its policy and impose sanctions more frequently. This effect provides an estimate of the effectiveness of an intensified use of sanctions. Our results show that an intensified use of sanctions would be quite effective in reducing welfare dependency and enhancing employment uptake. A sanction increases the probability of leaving the welfare system within eight months after the benefit cut by about 70 percentage points. Similarly, the probability of taking up employment subject to social insurance contribution rises by more than 50 percentage points. Therefore, we have to conclude that a more intensive use of benefit cuts in accordance with the legal requirements would contribute to making the labor market activation of welfare recipients more effective and would substantially increase the transition rate from welfare to work