Working Paper
Incentive problems with Hartz IV: ALG II instead of work?
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Welfare State
Labor Market
Germany
According to the principle of "promoting and demanding", Hartz IV should help unemployed people to live without transfers as quickly as possible. But calculations of the wage gaps between potential earnings and ALG II payments in this article reveal: Critical wage gaps that make full-time work unattractive in the primary labor market are particularly likely for low-skilled ALG II recipients with children and whose partner is not active on the labor market. These incentive problems are compounded when a potential job is located in the service sector or in the eastern employment market region. On the other hand, there is a strong incentive for highly qualified people and households with a working partner to accept a job offer. The wage gaps become more critical and are relevant for further groups of ALG II recipients when taking into account "1-euro job" income or marginal employment. ALG II threatens to become more attractive for unemployed and low-paid workers than a regular job.
