Fixing the leak: Unemployment incidence before and after the 2006 reform of unemployment benefits in Germany

From 2002-2004, the German government passed several laws that curtailed the generosity of the unemployment compensation system. One of the most ambitious changes was a considerable reduction in unemployment benefit entitlement lengths for older unemployed, which was effective during 2006 and 2007. We apply a difference-in-differences approach to show that the highly disputed reform induced a considerable decline in unemployment incidence among older workers. It thus sealed an important leak in the unemployment insurance system. Furthermore, we find a strong anticipation effect; unemployment entries of elderly workers peaked during the months preceding the reform.