Econometrics vs. Project Design: Lessons from the Evaluation of a Workfare Project

A common problem of welfare states consists of a high unemployment risk for low-skilled workers. This is often attributed to a lack of jobs for the low-skilled, but it may as well be caused by a lack of incentives to work. Low-skilled workers are easily substitutable and therefore have little bargaining power. Hence, they are typically dependent on low-paid jobs. This may create disincentives to work, if the achievable market wage does not sufficiently exceed the welfare level. Workfare could be an efficient strategy to overcome such disincentives by introducing a work requirement for unemployed welfare recipients. In our paper we investigate the importance of such a supply side policy. We evaluate a pilot workfare project of a Berlin city community to integrate young people in social assistance into the labor market. Reference data are generated in collaboration with the German Employment Office. The participation effect is found to be positive and of relevant size, but not statistically significant. This indicates that selection biases detected in the allocation process of individuals to the program can be adjusted by econometric techniques, but only at the prize of reduced significance levels. Given the small sample sizes of pilot projects this calls for social experiments in controlled project designs.