Extending Unemployment Insurance Duration for Older Unemployed: A Step in the Wrong Direction
By Jennifer Hunt

On the night of Monday November 12, the governing CDU/CSU/SPD coalition agreed in principle to extend the duration of unemployment insurance (Arbeitslosengeld) for the older unemployed. It is clear that the motivation for the proposals is political, marking the success of the SPD faction led by Kurt Beck, which fears being outflanked on the left by the Left Party, and marking the waning political fortunes of the modest reforms of former Chancellor Gerhard Schröder's Agenda 2010. Unemployment has been falling in Germany: using the ILO measure, the seasonally adjusted unemployment rate fell from 8.3 percent to 6.4 percent between March 2006 and April 2007, the most recent available month. Although the over-55 age group has a higher unemployment rate, it too is falling, albeit more slowly. While political calculations may favor extensions to unemployment benefits, economic calculations do not. Rather, they constitute a step backwards in the fight to increase the share of people over 55 who are working.

The Schröder government reduced the maximum duration of unemployment insurance for older people from 32 months to 18 months effective in 2006, and curtailed the early retirement options which had effectively permitted unemployed people to retire at 58. Under the current grand coalition proposals, those unemployed aged 58 or older would be eligible for up to 24 months, those unemployed aged 55-57 for up to 18 months, and those unemployed aged 50-54 up to 15 months, leaving others at the usual 12 months. The 2006 reforms have been in place too briefly to be analyzed. However, the extension of benefits from 12 months to durations as high as 32 for the older unemployed in the mid-1980s has been well studied. The results are unsurprising: as benefits were extended, older people stayed unemployed longer. The unemployed became less likely to take a job, and also became less likely to withdraw from the labor force entirely. The magnitudes of the effects were large. For males unemployed in their 40s, the extension of their benefits reduced their probability of finding a job within six months from 55 percent to 36 percent.

It is important for Germany to increase the share of older people who are working for the financial and psychological well-being of the people themselves, for the productivity of the German economy, and for the solvency of the public pension system. The proposed extensions will do less harm than the extension enacted in the 1980s. The extensions are less radical and would be implemented by a reformed employment agency, the Bundesagentur für Arbeit, that puts more emphasis on finding jobs than did its predecessor, which anecdotally did not even mention jobs as a possibility to older unemployed. However, the changes would scale back reforms that have been working well. Employment rates for men 55-64 rose from 46 percent in 2000 to 56 percent in 2006 (compared to 67 percent for the United States in 2006), while the numbers for women rose from 29 percent to 41 percent (compared to 56 percent for the United States in 2006). It is essential to stick to the timetable that raises the age of eligibility for various early retirement schemes, preparatory to their eventual abolition.

The successful increase in incentives to work and the promising reform of the employment agency are not sufficient to solve all labor market woes of older Germans, however, as some of the problem lies in low demand for such workers. This problem can be alleviated by shifting taxation away from payroll taxes, which increase the cost of labor. For this reason, the cut in unemployment insurance contributions implemented by Chancellor Merkel, and the further proposed cut, are very welcome. Such cuts should not be countered by extensions to the duration of unemployment insurance.

Jennifer Hunt is a professor in the Department of Economics at McGill University and a member of the AICGS Senior Advisory Council.

This essay appeared in the November 30, 2007, AICGS Advisor.