The dynamics of welfare entry and exit among natives and immigrants

Abstract

This paper studies welfare entry and exit in Germany and determines the relevance of state dependence. We separately consider natives and immigrants after a substantial reform of the German welfare system. Based on dynamic multinomial logit estimations, we calculate transition matrices between three mutually exclusive labor market states. We find that temporal persistence in welfare participation can mostly be explained by observed and unobserved characteristics. Immigrants appear to have a higher risk of welfare entry and a lower probability of welfare exit compared to natives. The results do not yield strong evidence of state dependence or of an overall welfare trap.