Assessing the employment effects of the German welfare reform -- an integrated CGE-microsimulation approach

The purpose of this article is to quantify the employment effects of the recent German welfare reform. The key element of this reform was to merge the coexisting transfer systems Social Assistance (SA) and Unemployment Assistance (UA) into one unified benefit (Arbeitslosengeld II -- ALG II). We also consider a second reform scenario that is intended to further improve the labour supply incentives of low-skilled workers. Our methodological contribution is to use an integrated CGE-microsimulation model. In adopting such an approach, we are able to combine the advantages of microsimulation studies by accounting for the large amount of heterogeneity in terms of households’ preferences and budget constraints with the advantages of an applied general equilibrium model. The latter permits us to identify potential general equilibrium repercussions through changes in wages and unemployment. The simulations indicate that the introduction of ALG II results in a negligible increase in employment of only 45 000 individuals. In contrast, a cut in benefit levels combined with a decrease in transfer withdrawal is shown to produce somewhat larger employment effects of about 190 000 individuals.