DIW Applied Micro Seminar

Abstract: This paper uses panel data from the German Socio-Economic Panel (SOEP) to analyze welfare entry and exit and to determine the relevance of state dependence. We separately consider natives and immigrants after a substantial reform of the German welfare system ("Hartz reform"). Based on results from dynamic multinomial logit models, we calculate transition matrices between three mutually exclusive labor market states (inactivity, employment, welfare receipt). We find that temporal persistence in welfare participation can for the most part be explained by observed and unobserved characteristics. In general, immigrants appear to have a higher risk of welfare entry and a lower probability of welfare exit compared to natives. On average, they are three times more likely to remain welfare recipients over time than natives. The analysis identifies non-EU citizens, who are mostly of Turkish origin or citizens of the successor states of former Yugoslavia, as the group with the lowest employment stability, the highest persistence in welfare participation, the highest welfare entry rate, and the lowest welfare exit rate. The results do not yield strong evidence of state dependence or of an overall welfare trap.