Lecture 3 Drawbacks of Microsimulation studies 1 Alexander

Lecture 3 Drawbacks of Microsimulation studies 1 Alexander Spermann, University of Freiburg, SS 2008

Lecture 3 Five practical examples for misinterpretations of microsimulation studies 2 Alexander Spermann, University of Freiburg, SS 2008

Lecture 3 1. 2. 3. 4. Minijobs Unemployment benefit II Combination wages Non-conditional basic income scheme 5. Workfare Alexander Spermann, University of Freiburg, SS 2008

1. Minijobs Lecture 3 • Minijobs: 400 € jobs (without social contributions for employees) may be filled by incumbent workers (additional to a full time job) as well as only-minijobbers. • Steiner (2004) estimates very low employment effect of minijob reform in Germany. • However, he ignores the effect on incumbent workers which cannot be estimated due to data constraints. Alexander Spermann, University of Freiburg, SS 2008

1. Minijobs Lecture 3 • Arntz/Feil/Spermann (2003) estimate very low employment effects for only minijobbers, but highlight that microsimulation studies only catch a very small part of the real world. • They expect a significant effect on incumbent workers due to theoretical reasoning and empirical pre-reform experience. Alexander Spermann, University of Freiburg, SS 2008

1. Minijobs Lecture 3 • In reality, the effect on incumbent workers was even much higher than expected by AFS 2003. • Conclusion: A exclusive look on microsimulated employment effects was completely misleading. You better combine theoretical and empirical analysis for a fair assessment of the minijob reform. Alexander Spermann, University of Freiburg, SS 2008

2. Unemployment benefit II Lecture 3 • Microsimulation study from Schnabel et. al. 2007 reveals low fiscal burden of the 2004 reform. • If the study were a real ex ante evaluation in 2004, results would have been misleading. • Main reason: Crucial behavorial responses of people could not be simulated. Alexander Spermann, University of Freiburg, SS 2008

2. Unemployment benefit II Lecture 3 a) b) • Lower barrier to entry for hidden poor due to lower stigma of job center Split up of household to increase overall benefit receipt However, both behavorial responses played a crucial role and increased fiscal burden. Alexander Spermann, University of Freiburg, SS 2008

3. Combination wages Lecture 3 • Ifo Institute Munich estimated high employment effects of the so-called ifoactive public assistance model (ifo institute 2007). • Most of the effect comes from a substantial drop of basic income level. • However, labor supply and labor demand elasticities are only defined for infinitesimal changes rather than substantial changes. Alexander Spermann, University of Freiburg, SS 2008

3. Combination wages Lecture 3 • Microsimulation runs into a out of sample prediction problem. Background: Microsimulation studies use estimated labor supply and labor demand elasticities to evaluate policy reform. • More reliable is the Sachverständigenrat (2006) study, although the estimated drop of basic income is also very large. Alexander Spermann, University of Freiburg, SS 2008

4. Non-conditional basic income scheme Lecture 3 • Proposal of Althaus (2007), Micro-Macro Simulation by ZEW (Council of Economic Advisers, Annual report 2007) • Static Microsimulation yields positive employment effects but huge fiscal burden associated with Althaus-proposal. • General equilibrium effects and labor demand effects can be captured by a certain amount but are still rudimentary. Alexander Spermann, University of Freiburg, SS 2008

4. Non-conditional basic income scheme Lecture 3 • Important dynamic issues cannot be simulated, e. g. human capital investment effect, social norm effect. • Conclusion: Dynamic effects should even worsen the negative fiscal effects, unless people completely change their behavior by such a fundamental reform (which could be in principle). Alexander Spermann, University of Freiburg, SS 2008

5. Workfare Lecture 3 • IZA-Microsimulation on Workfare (Schneider and Bonin 2007) shows strong positive employment effect (+1. 4 million additional full time equivalents) and enormous fiscal savings (25 million € each year). • This reform proposal seems to be the most promising. Alexander Spermann, University of Freiburg, SS 2008

5. Workfare Lecture 3 • However, important behavioral responses are neglected a) Disability insurance effect: People receive the same amount like unemployment benefit II recipients if they claim to be disabled (which will happen due to U. S. and U. K. experiences) Alexander Spermann, University of Freiburg, SS 2008

5. Workfare Lecture 3 b) Fiscal costs of necessary public sector jobs might be higher than expected, especially if people perceive them as opportunity rather than deterrence c) Displacement effect will play a role in some local labor markets Alexander Spermann, University of Freiburg, SS 2008