How to Fight Long-Term Unemployment: Lessons from Germany

The number of long-term unemployed in Germany has stagnated at around one million for several years. Despite excellent labour market conditions, the long-term unemployment rate is well above the OECD average. Therefore, the "carrot and stick" principle of Hartz reforms is in clear need of further development. The author proposes an overall concept for preventing and reducing long-term unemployment and long-term basic income receipt. An important element is an activation strategy for long-term unemployed and long-term basic income recipients that implies interim target setting and requires more and better trained case managers in the job centres.


Introduction
The German labour market has changed drastically over the last ten years. Just a decade ago there was mass unemployment with roughly five million unemployed people and low employment rates. Germany was labelled "the sick man in Europe".
Today, unemployment is well below the three million threshold and employment rates are at a record high. Germany has been dubbed a job wonderland and European champion with regard to its labour market (see Rinne/Zimmermann 2013 andDustmann et al. 2014).
Against this backdrop, it is time to reflect on the further development of the basic income system in Germany. It is indeed true that the Hartz reforms, which are considered internationally as the largest labour market reforms in post-war history, led to a clear decline in the number of unemployed and long-term unemployed people; however, the interim reports after five and eight years of the Hartz IV reform (see Koch et al. 2009 andDietz et al. 2013) clearly show that the problem of long-term unemployment and long-term basic income receipt remains unsolved. Roughly one million people have remained unemployed for longer than one year and therefore are considered long-term unemployed. Approximately three million employable individuals received basic income for about two years or longer and are considered long-term basic income recipients. Note that the 2005 Hartz IV reform as a part of the Hartz reforms refers to the merger of unemployment assistance and public assistance to one means-tested and tax-financed basic income scheme which allowed previous public assistance recipients access to active labour policy instruments. Therefore, the "carrot and stick" principle of the Hartz reforms is in clear need for further development.
The paper is structured as follows. In chapter 2, empirical evidence with a focus on long-term unemployment will be summarised following a depiction of long-term 4 unemployment and long-term basic income receipt. Chapter 3 serves to shed light on the practice of "carrot and stick". In Chapter 4, a differentiated three-pillar concept for preventing and reducing long-term unemployment and long-term basic income receipt will be outlined on the basis of different experiences with Hartz IV over the last ten years. A conclusion to this issue is given in Chapter 5.

Long-term unemployment and long-term basic income receipt in Germany
In Germany, people who are unemployed longer than 12 months are considered long-term unemployed. Between 2005 and 2011, the number of long-term unemployed people decreased considerably from roughly 1.8 million to roughly 1 million. Since then, the number of long-term unemployed has remained largely unchanged, as illustrated by Figure 1. Long-term unemployed receive either tax-financed and means-tested basic income (i.e. Hartz IV) or social security contribution-financed unemployment benefits. More than ninety percent of the long-term unemployed are Hartz IV-recipients. Only almost ten per cent of long-term unemployed receive unemployment benefits. Therefore, the policy relevant group are not just long-term unemployed but the larger group of long-term basic income recipients. Note that there is still a basic income system for disabled people who are not able to work at least three hours per day.
Risk factors for long-term unemployment include older age and lack of vocational training. Almost half of unemployed older people over the age of 55 are long-term unemployed, of which more than one fourth has been long-term unemployed for a very long time (more than two years). With respect to vocational training: Almost 52 per cent of all long-term unemployed people have not completed any vocational training (see Federal Employment Agency 2014a). Health issues and family status (couples with children and single parents) also play an important role for the longterm basic income recipients (see Graf 2007, Graf/Rudolph 2009, Dietz et al. 2013, Koller-Bösel et al. 2014).
Barriers such as older age and health issues are often present at the same time.
Multiple barriers are therefore particularly problematic because the probability of transition to employment is cut by almost half if you add one more risk (see Achatz/Trappmann 2011).
Supporting evidence for scarring effects of long-term unemployment comes from a field experiment conducted in the U.S.. Kroft et al. (2013) find adverse effects of a longer unemployment spell i.e. negative duration dependence. Long-term unemployment not only reduces employability and the probability of being employed in the future, but also causes people to become lonely and sick. The loss of a social network through job loss brings about an unexpected shock, which can even cause otherwise confident people to become insecure when applying for jobs for which they are over-qualified. Hundreds of unsuccessful applications lead to feelings of discouragement, worthlessness as well as lack of prospects and even depression (see Winkelmann/Winkelmann 1998, Böckerman/Ilmakunnas 2009, Knabe et al. 2010. It is therefore seen as positive that the Federal Minister of Labour and the Federal Employment Agency now want to intensively address the issues of long-term unemployment and long-term basic income receipt. 3. The German "carrot and stick" ("Fördern und Fordern") principle in practice

Sufficient and qualified personnel in the job centres
Some core institutional features of the complicated German system have to be mentioned beforehand. First, short-term unemployed who receive social security contribution financed unemployment benefits are clients of job placement officers in 156 regional employment offices. Second, means-tested long-term unemployed who receive tax-financed basic income (i.e. Hartz IV) are clients of case managers in 413 job centres. Both regional employment offices and 303 job centres are part of the Federal Employment Agency in Nuremberg. In addition to these 303 job centers, 110 job centres are under local management by municipalities thereby being more independent of Nuremberg.
Having sufficient and qualified personnel in the employment agencies and job centres is a prerequisite to successfully implementing active labour market policy tools. This is confirmed by comprehensive empirical evidence (see Rosholm 2014). In Germany, job placement officers in public employment services had to deal with up to 800 unemployed in the nineties. Empirical studies with comparison groups using Propensity Score Matching to solve the fundamental evaluation problem showed that a relationship of 1:60 allows job placement officers to do a better job: It turned out that the job placement probability of the treated was 15.31 percentage points higher (see Jerger et al. 2001). These results induced policymakers to invest in job placement 8 officers as a part of the Hartz reforms.
However, case managers in job centres have currently been overloaded with dealing with long-term unemployed with multiple job placement risks such as health and debt issues, especially in regions with a high density of long-term unemployed. Therefore,

What works?
In international literature a distinction is typically made between four types of labour market policy instruments (see Boeri/van Ours 2013, Cahuc et al. 2014: support with the job search, further training, wage subsidies and public job creation schemes. A macro meta-analysis by Martin (2015) illustrates that the joint effect of all active labour market instruments is significantly negative with respect to unemployment. A micro meta-analysis by Card et al. (2010) shows that the overall labour market policy has a significantly positive and long-term influence on individual employment prospects.
On a national level, Kluve (2013) shows that providing job search assistance has a short-term, positive effect and is cost-effective, whereas further training has a negative short-term effect but was, however, positive in the long run. Wage subsidies have a short-term positive effect, however, the long-term effects are still unclear due to possible indirect influences. Job creation schemes have both a short-term and longterm negative influence on the employment prospects for the unemployed. However, the expenditures and participant numbers for active labour market policy instruments have been dwindling for some years.
Overviews of the German evaluation studies on active labour market policies after the Hartz reforms are provided by Jacobi/Kluve (2006) Overall, Dustmann et al. (2014, p. 184) conclude that the Hartz reforms have contributed to the decline in long-term unemployment.
In-work benefits as an element of the German basic income scheme have also been subject to scientific and public debate under the heading "combi-wage model" for over a decade (see Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2006) and Dietz et al. 2013). Policy proposals that focused on lower basic income level and lower benefit reduction rates (BRR) to incentivize basic income recipients were rejected by all political parties. Implementing low BRRs into a high basic income level would create additional basic income recipients thereby boosting fiscal expenditures. For example, a benefit reduction rate of 50% would provide a high incentive to work; however, it would also cause the tax-exempt income to double resulting in a large number of former taxpayers becoming basic income recipients. The German solution takes this trade-off into account: Below net income of 100 €, the BRR is zero, between 100 and 800 €, it jumps to 80 %, between 800 and 1200 €, it slightly increases to 90 %, and beyond the BRR equals 100 % (see Dietz et al. 2009).
Nevertheless, Cremer (2013) summarizes the situation as follows: "The in-work benefit regulation is very useful, not to say a social achievement".
Furthermore, temporary in-work support via earnings disregards and supplementary basic income schemes have proven to be successful by randomized controlled trials in Canada (see Michalopoulos 2005) and by a quasi-experiment in Germany (see Spermann/Strotmann 2005). A temporary in-work benefit for long-term unemployed (Einstiegsgeld) became a standard active labor market instrument in Germany in 2005 and has been positively evaluated several times (Dietz et al. 2013). However, the Canadian experience showed that the initially positive treatment effect faded out after a while (see Card/Hyslop 2005).
Combining temporary in-work support with a post-employment component has turned out to be successful with respect to sustainable employment of previous welfare recipients and long-term unemployed. The Canadian Self Sufficiency Program Plus, a programme for single-parent welfare recipients, found sustained effects with an increased employment rate averaging nearly 7 percentage points 36-52 months after randomisation in comparison with a program that provided financial in-work benefits alone (see Robins et al. 2008 andDorsett 2014). The UK Employment Retention and Advancement (ERA) programme used a randomized controlled trial -one of largest ever undertaken in Britain -to identify the causal effect. The treatment was a package of financial incentives such as earnings supplements for taking-up a full-time job, an employment retention bonus, tuition assistance for training courses as well as adviser support. Treated long-term unemployed had a 2.2 percentage point higher probability of working five years after randomization than the controls. Furthermore, ERA proved cost-effective for long-term unemployed from the perspectives of the participants themselves, the Government budget, and society as a whole (see Hendra et al. 2011 andDorsett 2014). These results give guidance based on hard evidence for the further development of German active labor market policy.

Current pilot projects
(1) Employer subsidies plus coaching In 2012 As employer primarily pay for dual education, selection of candidates is tough so that applicants have to overcome big obstacles to start an apprenticeship. Therefore, vacancies are not filled although candidates are searching for apprenticeships. One way to solve this mismatch issue might be so-called partial dual education systems.
The basic idea is to split up an apprenticeship into standardised and self-contained modules that are individually certifiable. Accumulated modules lead to a partial qualification below the apprenticeship qualification level. This allows low-qualified people to enter the dual education system stepwise. Otherwise, they would have been 13 lost for apprenticeship and remain low-qualified. A preliminary descriptive evaluation of the partial dual education system based on small numbers and ignoring the fundamental evaluation problem has been positive (see Federal Employment Agency 2013c, 2014b).

"Stick" policy in practice
The "stick"-element of the Hartz reform principle highlights the obligation to work.
Public employment (so called "one euro jobs") has been used on a large scale to check whether eligible basic income recipients are willing to work (see Achatz et al. 2012). An integration agreement, in which the job search duties are set down in a written text, was introduced into legislation (see Dietz et al. 2013u. van den Berg et al. 2014. Rules for stepwise sanctions up to a complete benefit withdrawal were implemented to minimize regional variation and to maximize consistency (see Dietz compliers. This might lead to the conclusion that higher sanction rates could help.

More carrots, more sticks?
In current political debates, both opposition parties are requesting more money, in particular for publicly financed job creation schemes (see www.pothmer.de and German Bundestag 2014a). However, job creation schemes are associated with negative employment effects due to lock-in effects (see Eichhorst/Zimmermann 2007). More of such carrots do not help.
Higher sanctions rates would not solve the issue either if you take bypassing strategies well-known by practictioners into account that are typically not revealed by administrative or survey data. Today, basic income recipients are already taking up so-called mini jobs (social security contribution free jobs with a maximum of 450 euros per month) or even mini-mini jobs (200 euros per month) in order to formally comply with the obligation to work and to maximize net income according to the BRRs (see Dietz et al. 2009). There is also anecdotal evidence of basic income recipients combining both mini jobs and informal labor in the shadow economy. People further circumvent the law by sending standardized applications or attending job interviews yet make it clear to the employer that they are not interested in the job being offered. It is also common practice to accept a position only to claim that they are ill via a medical certificate submitted just a few days after starting the job. Empirical evidence on this matter can also be found for temporary work agencies (see Federal Employment Agency 2014d).
As an interim conclusion, it is important to note: Neither more carrots by publicly financed job creation schemes nor higher sanction rates will reduce long-term unemployment. Instead, the "carrot and stick" principle needs further development.
This will be discussed in the following chapter.

A differentiated concept for preventing and reducing of long-term unemployment and long-term basic income receipt
Long-term unemployed and long-term basic income recipients form a heterogeneous group and it is for this reason that a differentiated concept is required: 'One size does not fit all'. In the following section, a three pillar concept for preventing and reducing long-term unemployment and long-term basic income receipt is proposed. The first pillar highlights prevention of unemployment, the second pillar focuses on minimzing inflow from short-term unemployment and the third pillar is dedicated to maximize outflows to the labour market and education rather than fully subsidized job creation schemes.

Pillar 1: Prevention is the best kind of medicine
Early childhood education, completion of school as well as good written and spoken German language abilities lead to the first threshold -the transition between school and vocational training. This transition, however, needs to be more successful in the future, as the lack of professional training is a central risk factor for long-term unemployment. Roughly 1.5 million young people between the ages of 25 and 35 currently have not undertaken any vocational training. This is where the described education programs come into play.
Prevention also pertains to the partners and children on long-term unemployed and long-term basic income recipients. "Careers in the basic income system" need to be prevented. Language courses can help to reduce functional illiteracy and thus increase employability. Part-time education could help young mothers and fathers get access to job training. Particular emphasis is placed on enabling people to get training and employment opportunities. However, the supporting infrastructure needs to function even when it comes to part-time education: full-day childcare in daycare centres, kindergartens and schools needs to be ensured. Contact with the labour market can also be created through internships and mentoring for the working population.

Pillar 2: Minimizing inflows from short-term unemployment
Minimizing the inflow rate has been a policy focus of the Hartz reforms. Job placement officers may use all available active labor market policy instruments conditional on budget constraints. Performance-related pay of job placement officer might be an additional route to follow (see Hasnain et al. 2012). However, the heart of the solution most likely lies in professional competency diagnostics by regional employment agencies` staff. Job placement officers face the challenge of making the short-term unemployed person's strength more suitable and stronger for the labour market and to match these strengths with corresponding job offers in a timely manner. Lastly, job placement strategies must be continuously optimised in order to minimise the inflow rate from short-term unemployment (see van den Berg et al. 2014).

Pillar 3: Maximizing outflow to employment and education
The outflow rate from long-term unemployment to employment and education was just about 40 % in 2014 as reported above. What could be done beyond applying the active labour policy instruments that have proved successful in the past?
First, misleading target setting is one issue. Currently the concept of activation taken by the Federal Ministry of Labour and Social Affairs also allows activation towards a publicly subsidized labor market (so called secondary labor market). The activation ratio for long-term basic income recipients is even explicitly defined as activation in the secondary labour market in the federal strategic controlling system (see Federal Employment Agency 2014b and www.sgb2.info). Such a definition implies incentives for case managers to place long-term unemployed in publicly funded job creation schemes rather than in employment and education.
Second, barriers to take up employment might be too high for long-term unemployed in the short-run so that attainable interim targets for long-term unemployed people and long-term benefit recipients are to be defined. Moreover, not only the result of the activation -obtaining employment subject to social security contributions or commencing a vocational training programme and further education -but rather the activities aimed at taking up a job are to be understood and valued as the joint success of the case manager and long-term unemployed or long-term basic income recipient. For this, a wide range of activities should be permitted (i.e. volunteer work, networking and soft skills training).
This interim target setting is illustrated by the following two examples. Example 1: Mr X is a very long-term unemployed long-term basic income recipient without professional qualifications. He has addiction, debt and psychological problems; and yet is still fit to work a minimum of three hours daily thereby receiving basic income (Hartz IV). Active labor market policy instruments used in the past were generally ineffective: Private employers did not want to hire him despite the fact that they would receive employer subsidies. Issued job placement vouchers were not redeemed, selfemployment was ruled out, one-euro jobs were ended after a few days due to illness and he stopped attending education programs financed with education vouchers after a short period of time. Over several years, he could not be integrated into the labor market, nor was he able to transition into an education program.
As part of an activation approach, case manager and Mr X agree on activities that will help Mr X reach interim targets. An interim target could be to get his debt and drug problem under control to a point where he at least can be employed. Activities such as consultation appointments with debt and addiction counsellors would be accepted by his case manager as steps towards the interim target. A second interim target to be pursued simultaneously could be social integration. Acitivities such as taking on voluntary work (e.g. in a soup kitchen), taking part in sporting activities (e.g. walking) and networking (e.g. family, friends, Xing groups) would be appreciated by his case manager. Activities bring structure to the day and may enhance skills, e.g.
Lechner/Sari (2014) confirm positive long-run income effects of sports activities estimating dose-response relationships. The third interim target -increasing employability -can be only be set once the more pressing personal problems have been solved. Soft skills training and mobile learning could also be good activities.
Example 2: Ms Y is a low-qualified, single mother of two children with health and selfconfidence problems, high immobility due to her caring responsibilities -she is not long-term unemployed, however, is a long-term basic income recipient. Due to her obligations at home, traditional labour market policy tools are not very effective.
Furthermore, outflow from the basic income system is only possible with a very high net income. However, a net income of 900 euros is enough to no longer be dependent on basic income. This is ensured by the so-called child allowance (see Federal Employment Agency 2014e). Against this backdrop, the first interim target to removing employment barriers could be: Organising childcare and obtaining psychological support. These would be appropriate activities to increase self-esteem.
Answering questions pertaining to career orientation (What do I want to do?) and qualification programmes (What training do I want to receive?) could be an additional interim target. Profiling (analysis of strengths and weaknesses) and training measures could be suitable activities for this purpose. Completing an internship (possibly as part of a education program) and taking on a mini-job could be the following steps. These activities have to lead towards employment in the long-run.
The same logic applies to education programmes. Partial dual education system allow for a stepwise approach. However, placing the focus solely on education programmes ending with certified qualifications does not fully reflect labor demand.
There is an increased demand for special skills (hard and soft skills) on the labour market, which can at least be partially obtained without attending education problems and 20 per cent require psychosocial support. By contrast, no more than one fourth of these people received appropriate counselling services (see Kaltenborn/Kaps 2012). In the event that the required debt, addiction or psychosocial consultation is not available to achieve an interim target, this target will not be achieved. Third: although further training for case managers has started, only a minority of job centres' case managers has been certified so far. There is clear need for investment in their training. Fourth: over the past few years, the high share of fixed-term contracts for case managers has led to extremely high staff turnover in the job centres. As a result, interim target setting and coaching has been an exception in practice so far. In the meantime, the ratio of fixed-term contracts has dropped to under ten per cent on average (see German Bundestag 2014b). However, media reports reveal work overload in regions with high concentration of long-term unemployed resulting in high regional staff turnover.

Number of case managers
Case managers are key to the success of an activation approach. Therefore, case managers need time to effectively counsel and coach long-term unemployed. A better ratio -case managers to long-term unemployed /longterm basic income recipients -is an investment in better support. Case 21 managers would therefore need to be hired on a larger scale.

Case manager's further training
In addition to quantity, the quality of the case manager is also a crucial factor for successful activation. Certified further training of case managers has been implemented in principle. However, due to job centre's budget constraints a nationwide rollout is far from reality. An important issue is the quite difficult role of case managers because he/she is perceived as a representative of the authority that grants basic income. Building trust is therefore required; however, previous experience shows that this needs sufficient time for counselling and coaching (see Knuth et al. 2014 andBoockmann/Brändle 2015).

The availability of social integration services
The nationwide availability of addiction, debt and psychosocial counsellors (social integration services) is a large problem. On top of that, just two thirds of the job centres give data on the social integration benefits to the Federal Employment Agency -to this effect, there is a lack of transparency regarding the available regional social integration benefits (see Adamy/Zavlaris 2014).
If, after years of intense activation, individuals are not successfully integrated in the labour market then employability is not a realistic target anymore. In these cases, it would make sense to obtain further support from other legal systems such as the basic income system for disabled or handicapped. In such a case, employment rehabilitation service tools and social policy schemes are available rather than active labor market policy instruments.

Conclusion
Despite the fact that employment in Germany rose by 43 million and unemployment dropped to 2.7 million by the end of 2014, ten years after the Hartz IV reforms, longterm unemployment and long-term basic income receipt is a major issue in the 22 German labor policy debate. At that time, a definition of employability that is very broad by international comparison was selected: Individuals who can work at least three hours per day are considered employable. Experience with the "carrot and stick" principle of the Hartz reforms has proven that institutional reforms and some of the active labour market policy instruments are beneficial and contributed to the reduction of long-term unemployment. Nevertheless, the number of long-term unemployed people remained largely unchanged at roughly one million over the last few years.
The high risk factors for long-term unemployment are lack of professional qualifications and age. Health issues and family status also play an important role within it comes to long-term basic income receipt: 3.1 million individuals were classified as long-term basic income recipients in 2013.
In a weakening economy, the problem of long-term unemployment and long-term basic income receipt is likely to increase. Furthermore -when the concerns of many labour market economists are true -the introduction of a statutory minimum wage of EUR 8.50 per hour -the number of long-term unemployed people without professional qualification will surge more than ever before. Although long-term unemployed are exempt from the minimum wage for the first six months of a new employment relationship, yet this time period seems rather short. Against this background, it is all the more important for the federal government and the Federal Employment Agency to give precedence to further reducing long-term unemployment and long-term basic income receipt.
A differentiated concept for preventing and reducing long-term unemployment and long-term basic income receipt was brought forward. This concept consists of three pillars: Prevention of unemployment (pillar 1), minimizing the inflow rate from shortterm unemployment (pillar 2) and maximizing the outflow rate to employment and education (pillar 3).

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The activation approach taken in pillar 3 reflects the necessary further development of the "carrot and stick" principle. Unlike the first ten years of Hartz IV, interim targets should be set to allow a stepwise integration of the long-term unemployed and longterm basic income recipients into the labor market. Activation should lead to activities towards taking up jobs and retaining them rather than taking up subsidized public jobs. This is why target setting by the Federal Ministry of Labor and Social Affairs should be modified appropriately. Furthermore, the spirit should be different: Case managers should appreciate individual's efforts to reach interim targets. Actions aimed at joining the labour market in the long run are to be supported (e.g. voluntary work to build up potential networks, acquire soft skill training or even sports activities). This is how a trusting relationship can be built between long-term unemployed and their case managers.
On a societal level, there needs to be a stable consensus regarding the basic income system: if long-term unemployed and long-term basic income recipients are able to show efforts towards a long-run integration into the labor market, the feeling of altruism amongst the taxpayers could be strengthened (see Solow 1998).
A successful implementation of the proposed three pillar concept requires investment in education, labour market policy and social policy. Prevention of unemployment primarily needs educational investments. More and better-educated case managers are a precondition for implementing an activiation approach. Furthermore, social integration services (addiction, debt and psychosocial counselling) should be available nationwide. Continuous scientific evaluation reduces the risk of negative returns on investment. International evidence from the UK shows that a well-designed package for supporting the long-term unemployed could be cost-effective.