Is the general use of benefit sanctions really effective to activate the unemployed? Evidence from welfare recipients in Germany

Recently published studies that investigate the effect of benefit cuts on the employment prospects of unemployed show that sanctions substantially increase the probability of an individual to get employed. This evidence suggests at first sight that benefit sanctions are an effective tool in the activation process of the unemployed and should be used more frequently by welfare agencies to enhance employment uptake and to reduce welfare dependency. However, the effectiveness of the general usage of sanctions has not been thoroughly studied so far. In this paper we make use of a unique data set of German welfare recipients that is rich with respect to individual and agency level information. In particular we observe the general sanction strategy of a welfare agency. We apply this information to instrument individual sanctions and estimate the impact of a sanction on those individuals who would be the target group of welfare agencies if sanctions were used more frequently as part of an intensified activation strategy. Our results show that sanctions are not a remedy among this group to reduce unemployment or welfare dependency and might even be counterproductive. Therefore, we have to conclude that the general usage of sanctions is ineffective and cannot be recommended as a useful activation strategy. JEL-Codes: C31, I38, J64