The impact of sanctions for young welfare recipients on transitions to work and wages and on dropping out

The reintegration of young welfare recipients into the labor market is a major policy goal in many European countries. In this context monitoring and sanctions are important policy tools. In this paper, we analyze the impact of strict sanctions on job search outcomes for young welfare recipients in Germany. The German benefit system is characterized by harsh sanctions for this group. Strict sanctions effectively take away the benefits for three months if young welfare recipients do not comply with their job search requirements. We jointly analyze the impact of these sanctions on job search outcomes and on dropping out of the labor force based on administrative data on a large inflow sample of young male jobseekers into welfare. We estimate multivariate duration models taking selection based on unobservables into account. Our results indicate that there is a trade off between an increased job entry rate and an increased withdrawal from the labor force as well as lower entry wages. Sanctions increase the probability of finding a job, but these jobs go along with lower earnings. Moreover, sanctions significantly increase the probability of dropping out.