The Human Capital effect of reducing the disadvantage among the disadvantaged

• In Event: Inequality, Poverty, and Mobility Section Roundtables
  In Refereed Roundtable (60 minute): 14. Welfare

Abstract

This paper exploits one of the largest recent social-welfare reforms in Germany, the introduction of Bürgergeld in 2023, to shed light on the effectiveness of financial incentives in the decision to invest in human capital for economically disadvantaged teenagers. Specifically, the reform raised the threshold of non-deductible income from €100 to €540 for apprentices, while leaving other forms of labour income unchanged. This increased the relative financial attractiveness of apprenticeships for young people from welfare-receiving households. Using rich German administrative data, we implement a standard Event Study to compare changes in apprenticeship enrollment among low-educated youth from welfare households (SGB II) compared to equally educated teenagers from non-welfare households (SGB III). Our results show two main findings. First, before the reform, teenagers from welfare households were substantially less likely to start an apprenticeship than comparable non-welfare peers. Second, the reform increased the enrollment in apprenticeships among welfare teenagers, reducing this gap. More generally, we ahow the complex impact of insitutions on educational inequality and, in turn, on intergenerational persistence of disadvantages. Indeed, we demostrate how the way social policies are designed may impact educational decisions of teenagers from lower socioeconomic status families. On the other hand, increasing the fiancial incentives to invest in education seems to be an effective channel to increase human capital investments among disadvantaged teenagers and, ultimately, to reduce educational inequality. However, we also show how the response was heterogeneous: the effect was concentrated among native teenagers and among welfare households with relatively higher labour income. Therefore, although effective, financial incentives alone may not be sufficient for the most disadvantaged groups, pointing to additional non-financial mechanisms

Authors

• Nicola Ceccarini, IAB

• Pascal Heß

• Harald Pfeifer