How Effective are Generous Wage Subsidies for Long-Term Unemployed Welfare Recipients?

Abstract Long-term unemployment remains a pressing issue. In Germany – the case we analyse in this study – the overwhelming majority of the long-term unemployed receive welfare benefits, and thus, are often economically and socially disadvantaged. This paper provides first evidence on the effects of a novel and generous wage subsidy programme for long-term unemployed welfare recipients up to 14 months after the expiry of the subsidy. Using rich administrative data on the total population of programme participants from May to October 2019 along with a sample of comparison individuals without the subsidy, we employ ridge kernel propensity score matching to compare participants with nearly identical comparison individuals in terms of observed characteristics. Our results show large positive effects on employment and negative effects on welfare dependency. Particularly large effects are found for older individuals and those with an especially sparse employment history. Using worst-case bounds and simulations, we show that unobserved confounding is highly unlikely to drive our conclusions.