Non-employment and the welfare state: the United Kingdom and Germany compared

Summary Unemployment rates are insufficient indicators of the level of economic activity because they say little about the scale of non-employment in a given working-age population. Empirical research has started to recognize this and policy debates increasingly concentrate on working-age inactivity as a relevant gauge of the state of labour markets (OECD, 2003). However, the causes for transitions between employment and different states of non-employment are not well understood. Why do levels of working-age inactivity sometimes vary significantly across countries and over time? Apart from stages in the business cycle, welfare-state institutions and benefit designs can be assumed to influence movements into and out of labour markets and between different states of nonemployment. This paper investigates the impact of changes in welfare-state institutions in the UK and Germany. Analyses of longitudinal data show that economic conditions, as well as policy changes, have had significant effects on transitions between labour activity and inactivity among working-age men during the 1990s. In particular, the findings suggest that shifts to more means-tested benefit arrangements can have unintended consequences, in terms of increasing levels of labour-market detachment.