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Benefit Take-Up and Labor Supply Incentives of Interdependent Means-Tested Benefit Programs for Low-Income Households

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Abstract

Using a microsimulation model based on representative panel data, we analyze the outcomes of three major means-tested interdependent benefit programs that are available for low-income households in Germany with respect to benefit take-up and labor supply incentives. The results show a distinct overlap between the programs and high rates of non-take-up, indicating that the effectiveness of the programs in reaching their target groups could be improved. Furthermore, we find that workers from low-income households are confronted with a complex benefit structure and high marginal tax rates, which negatively affects the individual labor supply.

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Notes

  1. Regarding the targeting effectiveness of means-tested benefit programs, two forms of inefficiencies can be distinguished: Inclusion of non-entitled households (“leakage”) and exclusion of entitled households (“non-take-up”), see Tasseva (2016). We restrict our analysis to non-take-up, because of its obvious negative effect on poverty alleviation.

  2. Additionally, according to the official definition of child poverty, all children living in a household that receives SA are considered poor, while they are not considered poor if their needs are covered by other incomes than SA. Therefore, with the introduction of SCA the government tried to reduce the official measure of child poverty by moving households from receiving SA to receiving SCA.

  3. Until the end of 2005 the minimum income exactly coincided with the parents’ guaranteed income as provided by SA. Since many parents were unable to calculate their guaranteed income, a large share of the applications for SCA was rejected because the parents’ income was below the required minimum income. As a result, the minimum income rules of SCA were simplified at the end of 2005. Since then, the minimum income for SCA is either a gross income of €600 per month for single parents or €900 per month for couples with children. Both minimum incomes are roughly in line with the parents’ guaranteed SA income.

  4. SCA was raised to €160 per month and child on 1. July 2016 and further increased to €170 in 2017.

  5. There is reason to believe that for some households the running (non-pecuniary) costs of receiving SA might be considerably higher than the corresponding costs of receiving HA. The Job Centers responsible for managing SA are constantly putting pressure on the recipients to find a job that, ideally, pays well enough to enable the households to overcome their dependency on SA. Households who do not cooperate sufficiently in the search for a job can be sanctioned by the Job Centers. In contrast, when claiming HA, the administrating municipal housing offices do not exert any pressure on recipients to leave the HA system. HA recipients are only required to renew their application to HA once a year (or whenever their income situation has changed). Additionally, it can be assumed that SA as the last safety net is more stigmatizing than HA.

  6. The administrative districts receive an annual grant from the federal budget for their expenditures for the housing costs of SA recipients. The grant is calculated as a fixed proportion of total expenditure.

  7. For a detailed description of the reform elements, also see Bundesgesetzblatt (2015) and Winkel (2015).

  8. For a documentation of the STSM see Jacobebbinghaus and Steiner (2003).

  9. The legal definition given in § 8(1) SGB II loosely states that a person is employable if illness or disability does not prevent her from working at least 3 h a day under the regular conditions of the labor market for the foreseeable future. In practice, employability is determined by public health officers.

  10. See Haisken-DeNew and Frick (2005) and Wagner et al. (2007) for documentation on the GSOEP.

  11. A calculation for single households and couples without children shows that for these households SA always exceeds HA and that the household would always be better off with SA.

  12. Notice that the regular child benefit is not a means-tested benefit and therefore constant for all gross incomes.

  13. The benefit reduction rate is 100% for incomes above €1500 for families with children. This is not shown in Fig. 3, as the example single parent household loses its SA eligibility before achieving that income threshold.

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Acknowledgements

We thank the editor and two anonymous referees for helpful comments.

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  1. Institute for Employment Research (IAB) of the German Federal Employment Agency (BA), Regensburger Strasse 104, 90478, Nuremberg, Germany

    Kerstin Bruckmeier & Jürgen Wiemers

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  1. Kerstin Bruckmeier
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Correspondence to Kerstin Bruckmeier.

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Bruckmeier, K., Wiemers, J. Benefit Take-Up and Labor Supply Incentives of Interdependent Means-Tested Benefit Programs for Low-Income Households. Comp Econ Stud 60, 583–604 (2018). https://doi.org/10.1057/s41294-017-0041-5

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