Income support, employment transitions and well-being

Abstract

Using specific panel data of German welfare benefit recipients, we investigate the non-pecuniary life satisfaction effects of in-work benefits. Our empirical strategy combines difference-in-difference designs with synthetic control groups to analyse transitions of workers between unemployment, regular employment and employment accompanied by welfare receipt. Working makes people generally better off than being unemployed but employed welfare recipients do not reach the life satisfaction level of regular employees. This implies that welfare receipt entails non-compliance with the norm to make one's own living. Our findings allow us to draw cautious conclusions on employment subsidies paid as welfare benefits.

Keywords: In-work benefits; Income support; Life satisfaction; Social identity; Social norms; Subsidized employment; Unemployment.

Fig. 1

The different DiD designs. Note: The figure depicts the different transition and control groups and their respective numbers of observations. The sizes of control groups I.2 and II.2 (people who remain subsidized employed) slightly vary since the different sets of control variables cause missing values to a different extent. For our consistency checks on direct transitions between unemployment and regular employment, we rely on 589 transitions from regular employment to unemployment (control group of 22,696 regularly employed people) and on 1,032 observations of unemployed people who become regularly employed (control group of 12,024 unemployed people).

Fig. 2

Average changes in life satisfaction between subsidized jobs and unemployment. Note: Bars illustrate the average life satisfaction level of the respective transition groups (T) and control groups (C). Whiskers denote 95% confidence intervals. Control group balanced on first and second moment for test I.1 and on first moment for test I.2.

Fig. 3

Average changes in life satisfaction between subsidized and regular jobs. Note: Bars illustrate the average life satisfaction level of the respective transition groups (T) and control groups (C). Whiskers denote 95% confidence intervals. Control group balanced on first and second moment.

Fig. A1.I

Time trends in life satisfaction, household size and income – test I. Note: Black lines denote transition group trends, grey lines denote trends of the synthetic control groups (i.e. after entropy balancing). Whiskers display 95% confidence intervals. Transition groups change labour market status from t = −1 to t = 0, which denote two subsequent PASS waves with a time lag of approximately one year At time t = −2 (t = −3), transition groups are interviewed for the second-last (third-last) time before switching. All mean levels are normalized relative to the level at t = −3.

Fig. A1.II

Trends in life satisfaction, household size and income test II. Note: Black lines denote transition group trends, grey lines denote trends of the synthetic control groups (i.e. after entropy balancing). Whiskers display 95% confidence intervals. transition groups change labour market status from t = −1 to t = 0, which denote two subsequent PASS waves with a time lag of approximately one year. At time t = −2 (t = −3), transition groups are interviewed for the second-last (third-last) time before switching. All mean levels are normalized relative to the level at t = −3.

Fig. A2

Overlap of income distributions by labour market status. Note: Following the OECD equivalence scale, inflation-adjusted household income is divided by a weighted number of the persons living in the same household. While the first person gets a weight of 1, any additional person older than 14 years gets a weight of 0.5, children up to the age of 14 years get a weight of 0.3. Source: PASS 2007–2018.