Safety Net or Helping Hand? The Effect of Job Search Assistance and Compensation on Displaced Workers

The authors provide the first systematic evidence on the effectiveness of a contested policy in Germany to help displaced workers. So-called transfer companies employ displaced workers after job loss. Workers are provided with job-search assistance and are paid a wage that is a substantial fraction of their pre-displacement wage. Using administrative data on workers’ earnings and employment before and after displacement, the authors compare outcomes for displaced workers who enter transfer companies against a control group of displaced workers who do not. Using an event study, the authors find that workers who enter a transfer company have worse post-displacement outcomes, but this is the result of negative selection: Workers without outside opportunities are more likely to choose to enter the transfer company. By contrast, ITT and IV estimates indicate that the use of a transfer company has a positive and significant effect on employment rates five years after job loss, but no significant effect on earnings. The positive employment effect arises, however, because treated workers are less likely to leave social security employment rather than less likely to become unemployed.