Germany’s unemployment insurance system has long been a source of political debate. New research shows that reducing unemployment benefits can increase employment and economic output, as unemployed workers search more intensively and accept jobs more quickly. However, these gains come with less visible costs.
Workers become less selective and are more likely to accept jobs that are poorly matched to their skills, reducing average labour efficiency. Wages decline, earnings inequality rises, and households bear greater income risk. The effects also vary across groups, with younger and poorer workers responding differently from older and wealthier households.
Policymakers should therefore assess labour market reforms not only by their impact on employment and public spending, but also by their effects on job quality, inequality, and overall social welfare.
