December 2004

IZA DP No. 1420: The Transition from Welfare to Work and the Role of Potential Labor Income

published in: Journal of Applied Social Sciences Studies, 2005, 125 (1), 51-61

It is often argued that the high level of welfare claims in Germany causes little incentive for workers with low productivity to seek for a job. We examine the influence of the ratio between estimated potential labor income and the welfare payment level on the probability of leaving social welfare. Using the GSOEP, we estimate a discrete time hazard rate model with competing risks and unobserved heterogeneity. Our results show that the ratio has a positive effect on the probability of leaving social welfare. This effect is especially relevant for households with a potential labor income higher than their welfare payment level.