Lecture

Alexander Spermann, University of Freiburg, SS 2009

1

Drawbacks of Drawbacks of Microsimulation Microsimulation

studies studies

Lecture

Alexander Spermann, University of Freiburg, SS 2009

2

Five practical examples for misinterpretations of microsimulation studies

Lecture

Alexander Spermann, University of Freiburg, SS 2009

1. Minijobs

2. Unemployment benefit II

3. Combination wages

4. Non-conditional basic income scheme

5. Workfare

Lecture

Alexander Spermann, University of Freiburg, SS 2009

1. Minijobs

• 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.

Lecture

Alexander Spermann, University of Freiburg, SS 2009

• 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.

1. Minijobs

Lecture

Alexander Spermann, University of Freiburg, SS 2009

• 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.

1. Minijobs

Lecture

Alexander Spermann, University of Freiburg, SS 2009

2. Unemployment benefit II

• Microsimulation study from Schnabel et. al. 2007 reveals low fiscal burden of the 2004 reform.

• If the study had been a real ex ante evaluation in 2004, results would have been misleading.

• Main reason: Crucial behavorial responses of people could not be simulated.

Lecture

Alexander Spermann, University of Freiburg, SS 2009

a) Lower barrier to entry for hidden poor due to lower stigma of job center

b) Split up of household to increase overall benefit receipt

• However, both behavorial responses played a crucial role and increased fiscal burden.

2. Unemployment benefit II

Lecture

Alexander Spermann, University of Freiburg, SS 2009

3. Combination wages

• Ifo Institute Munich estimated high employment effects of the so-called ifo-active 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.

Lecture

Alexander Spermann, University of Freiburg, SS 2009

• 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.

3. Combination wages

Lecture

Alexander Spermann, University of Freiburg, SS 2009

4. Non-conditional basic income scheme

• 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.

Lecture

Alexander Spermann, University of Freiburg, SS 2009

• 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).

4. Non-conditional basic income scheme

Lecture

Alexander Spermann, University of Freiburg, SS 2009

5. Workfare

• 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.

Lecture

Alexander Spermann, University of Freiburg, SS 2009

• However, important behavioral responses are neglected

a) Disability insurance effect: People receive the same amount like unemploy- ment benefit II recipients if they claim to be disabled (which will happen due to U.S. and U.K. experiences)

5. Workfare

Lecture

Alexander Spermann, University of Freiburg, SS 2009

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

5. Workfare