Regional Discontinuities and The Effectiveness of PDF

REGIONAL DISCONTINUITIES AND THE
EFFECTIVENESS OF FURTHER TRAINING

SUBSIDIES FOR LOW-SKILLED EMPLOYEES
CHRISTINE DAUTH*
The author analyzes the effects of further training subsidies for low-
skilled employees on individual labor market outcomes in
Germany. Using detailed administrative data, the author exploits
cross-regional variation in the policy styles of local employment
agencies to identify causal effects of program participation. Findings
show that training subsidies significantly increase cumulative em-
ployment duration and earnings in the short run and middle run
for compliers, that is, those workers who additionally participate
due to a more generous policy style in their agency. These gains are
particularly pronounced for certain subgroups, such as women. A
rough cost-benefit analysis, however, suggests that the program over-
all is not beneficial for the public budget.
I n recent decades, low-skilled workers in particular have been affected by

the structural changes in employment due to globalization and skill-
biased technical change. The demand for a flexible and suitably skilled
workforce calls for repeated investments in education and training.
Acknowledging this trend, the European Commission encouraged govern-
ments to develop strategies to make lifelong learning available for everyone
*CHRISTINE DAUTH is a Senior Researcher at the Institute for Employment Research (IAB).
I am grateful to Wolfgang Dauth and Gesine Stephan for generous advice. I also thank Daniel
Hamermesh, Øivind Anti Nilsen, Yolanda Rebollo Sanz, Regina Riphahn, Núria Rodrı́guez-Planas,
Bastian Stockinger, the FBC1 unit at the IAB, and participants at numerous conferences, workshops, and
seminars for helpful comments. Specific thanks go to the DIM unit at the IAB for providing the data. My
study uses proprietary data that I am not authorized to post. I use data of the German Institute for
Employment Research (IAB), the so-called Integrated Employment Biographies (IEB). The IEB data are
social data with administrative origin, which are processed and kept by IAB according to Social Code III.
The data contain sensitive information and therefore are subject to the confidentiality regulations of the
German Social Code (Book I, Section 35, Paragraph 1). Consequently, external researchers need to
close a contract with the IAB to access social data on-site in Nuremberg or at other on-site locations in
Germany. This contract needs to be authorized by the Federal Ministry of Labour and Social Affairs. I
can provide additional results and copies of the computer programs used to generate the results pre-
sented in the article at christine.dauth@iab.de. An Online Appendix is available at http://journals.sage
pub.com/doi/suppl/10.1177/0019793919885109.
KEYWORDs: further training for employees, low-skilled workers, training programs, instrumental variables,
linked employer–employee data
ILR Review, XX(X), Month 201X, pp. 1–38

DOI: 10.1177/0019793919885109. Ó The Author(s) 2019
Journal website: journals.sagepub.com/home/ilr
Article reuse guidelines: sagepub.com/journals-permissions
2 ILR REVIEW
in 2000. Consequently, European policymakers directed great attention to

lifelong learning policies to support workers and firms in their training ac-
tivities and to help them adapt to structural changes. In order to judge
whether such government programs effectively improve the economic situa-
tion of workers, we need empirical evidence.
This study examines the impact of public subsidies for the further train-
ing of employed low-skilled workers on employment and earnings using high-
quality register data. Because I am particularly interested in heterogeneous
treatment effects, I also investigate subgroups. Several robustness checks
confirm the validity of the results.
Methodologically, I make use of exogenous variation in the local partici-
pation rate (LPR) at the regional level among unemployment agencies that
provide these subsidies in Germany. Specifically, I exploit residual variation
in the LPR after purging it from regional-, establishment-, and individual-
level confounders. I call this residual variation ‘‘policy styles.’’ Policy styles
vary across agencies because of differences in their organizational structures
and nonformal behavior of caseworkers. Although this affects the imple-
mentation of the subsidy program and thus the propensity to be treated,
policy styles are exogenous to the employment durations and earnings of
low-skilled employed workers. This allows me to address problems of selec-
tivity, that is, workers selecting into the program based on unobservable
characteristics, and identify causal effects.
I contribute to the literature in several ways: First, the bulk of literature is
concerned with subsidized further training for unemployed workers. The
existing literature on training subsidies for low-skilled employed workers
installed to prevent unemployment presents mixed results on earnings.
Providing new results, including the effects on employment, of a program
that so far has not been analyzed, I enhance the current state of knowledge.
Second, this study uses register data that are highly reliable, have daily pre-
cision, and offer a broad range of information on individual, establishment,
and regional characteristics. Third, exploiting regional variation I choose
an approach that has only occasionally been used to evaluate training pro-
grams. Focusing on compliers, I estimate the program effect for additional
workers who participate due to a more generous policy style of their agency.
This approach is informative as one can learn about the effects of a poten-
tial extension of the program.
German Training Subsidy Program

Organization of the Program
Germany has experienced striking structural changes in its workforce. Many
OECD countries experiencing the same changes fund training through
loans, subsidy programs, or tax deductions (Bassanini et al. 2007). Since
2002, the German Federal Employment Agency (FEA) has financially sup-
ported further training for low-skilled employed workers, supplementing
IMPACT OF TRAINING SUBSIDIES FOR LOW-SKILLED EMPLOYEES 3
Table 1. Percentage of Workers Employed on June 30 Who Seek Counsel or

Register Job Seeking While Employed
Year Counsel Job-seeking N
2007 0.075 2.27 461,217

2008 0.094 1.93 470,721
2009 0.195 2.41 468,485
2010 0.115 2.17 473,559
Source: Integrated Employment Biographies (IEB) V13.00. Author’s calculations.

Notes: I base the analysis on a 2% random sample of all German workers in the IEB data. I focus on
workers who are employed subject to social security contributions. I exclude workers receiving means-
tested welfare benefits according to Social Code II because they are not eligible for the kind of
subsidized training analyzed here.
further training for unemployed workers. However, only approximately

4,500 low-skilled employed workers were trained between 2002 and 2006
(Lott and Spitznagel 2007). Therefore, in 2007, the FEA created a new pro-
gram called WeGebAU to promote further training of employed workers
with training subsidies. These subsidies are intended to encourage the par-
ticipation of low-skilled workers, who show disproportionately low interest
in further training (Ok and Tergeist 2003; Fouarge, Schils, and de Grip
2013), and to raise employers’ (particularly small- and medium-sized firms)
propensity to further train their workforce.
The major responsibilities of the FEA are the reintegration of unem-
ployed workers and the distribution of unemployment benefits. The FEA
has the obligation to counsel both employed and unemployed workers. For
the cut-off date June 30, however, Table 1 shows that very few employed
workers were in contact with the FEA (for more details, see the section,
LATE Assumptions). Only approximately 0.1% of all employees sought
counsel by the FEA, and about 2% registered as job seeking, which they are
required to do when their current employment contract is about to end.
The subsidy program I analyze in this study is the only FEA program that
targets employed workers. Thus, in contrast to other FEA programs, which
are directed at unemployed workers, the subsidy program considered in this
study is unique. Another federal training voucher program for employees
(Bildungsprämie) has been implemented by local educational centers
(Görlitz 2010; Görlitz and Tamm 2016, 2017). That program is very differ-
ent from the program I study, however, because it subsidizes training that is
independent of the current employment relationship. The FEA program,
by contrast, subsidizes training that needs to be arranged with the employer
and is therefore directly linked to the current job.
The program is primarily targeted at low-skilled workers.1 Potential
participants are considered low skilled if they lack a vocational qualification
1
The program also targets the employees of small- and medium-sized firms (Dauth and Toomet 2016).
4 ILR REVIEW
Table 2. Inflows to the Subsidy Program and Per Capita Costs

for Low-Skilled Workers
Cost reimbursement Wage subsidy
(§81 (2) SGB III) (§81 (5) SGB III)
Year Inflows Costs in EUR Inflows Cost in EUR
2007 10,458 1,425.88 14,527 1,681.51

2008 23,007 2,279.19 28,571 2,977.99
2009 38,426 2,647.63 36,579 4,851.24
2010 17,374 3,961.28 14,809 6,832.72
Source: Statistics of the German Federal Employment Agency (FEA).
or have worked for at least four years in a helper job that did not require
any qualifications. Further eligibility criteria are that the employer releases
the employee from work to participate in training and continues wage pay-
ments during this absence. Subsidized training courses must focus on gener-
al rather than firm-specific learning because the objective is to improve
knowledge that is applicable in the general labor market. Only specially
accredited private providers can offer training courses. Moreover, a subsi-
dized training course is supposed to terminate with the receipt of a certifi-
cate. Courses include, for example, retraining to become an elderly care
nurse, nursery school teacher, greenkeeper, security guard, or machine and
plant operator with a duration of two to three years. Shorter training con-
sists of courses in the field of IT (such as UNIX, CAD, or MS Office), lan-
guage courses, and forklift and truck licenses.
Once these criteria are met, two possible types of subsidies are available:
First, the FEA may cover up to 100% of the training costs. Second, employ-
ers may receive wage subsidies to compensate for the workers’ reduced pro-
ductivities during training. If training takes place outside the firm, these
wage subsidies may cover up to 100% of the full wage. If training takes place
inside the firm, the employer is expected to share these costs. In this case,
the FEA covers a maximum of only 50% of the wage because firm-specific
elements of training are more likely.
Table 2 shows the inflows into the program by year and kind of subsidy.
Compared to other German active labor market policies (ALMP), the num-
ber of subsidy recipients is rather low (Büttner, Schewe, and Stephan 2015).
There were few entries during the introductory phase because awareness of
such subsidies was limited (Lott and Spitznagel 2007).
Table 3 displays the duration of subsidized training in days. Duration
refers to the period when an individual was officially registered as participat-
ing in further training. A training course lasted on average 142 days; the
median duration was 75 days. However, this is only a rough indicator for ac-
tual training intensity as training can be both full and part time.
Table 3. Duration of Subsidized Training in Days
Mean First quartile Median Third quartile
142 19 75 179
Source: Integrated Employment Biographies (IEB) V11.00–131009. Author’s calculations.
Nevertheless, we can expect substantial effects on employment and

earnings.
Role of Employers in the Selection Process

Because training is to take place during working hours, workers need to ar-
range for training with their employer. Both parties need to agree on train-
ing participation and the type of training, but there is no rule regarding
whether the firm or the worker has to initiate the training subsidy. It is not
well documented whether workers or firms initiate training or how firms
identify potential participants.
To infer how frequently employers or employees initiate training, I draw
on the WeLL data set from the project ‘‘Further Training as a Part of
Lifelong Learning’’ (Berufliche Weiterbildung als Bestandteil Lebenslangen
Lernens [WeLL]), which contains yearly survey information on the further
training participation of employees between 2007 and 2010 (Huber and
Schmucker 2012). Table A.1 in the Supplementary Online Appendix shows
that in approximately 42% of all cases the interviewed workers participating
in training had initiated training themselves. In about 40% of all cases, the
firm had initiated training, and the rest had participated in training that is
mandatory for the occupation or could not remember who had initiated
training. Workers who reported receiving subsidized training by the FEA
were slightly more likely to initiate subsidized training themselves in 2007
and 2008. Given these results, it is likely that in the underlying sample both
employers and employees initiated training to approximately equal degrees.
Once potential participants are identified, they meet with a caseworker at
one of the 176 local employment offices. The caseworker verifies whether
the worker meets the eligibility criteria and whether the training course se-
lected was certified by one of the 31 accreditation bodies in Germany. The
employee then receives a training voucher for either occupational retrain-
ing or a shorter training course. Workers can search for retraining or train-
ing courses using KURSNET, a database on the website of the FEA that
contains information on certified courses regarding provider, content, dura-
tion, the number of slots, and so forth.
In the introductory phase, the program was little known. Therefore, case-
workers promoted the program and actively reached out to firms to inform
them about the subsidy program. Consequently, more and more firms be-
came familiar with the program (Lott and Spitznagel 2007). The 2008 IAB
6 ILR REVIEW
Job Vacancy Survey reveals that approximately 44% of all firms with fewer
than 100 employees and 75% of all larger firms knew about the program
(Lott and Spitznagel 2010). Given the establishment size structure of the
underlying sample, at least two-thirds of all firms in the sample should have
known about the program. However, only about one-quarter of the firms
who knew of the program used subsidized training (Lott and Spitznagel
2010). Approximately 80% of those firms stated that they did not use the
program because there was no current operational need for training.
Industry, firm size, and firm performance are therefore likely confounders
of the LPR.
Firms’ motives to use subsidized training might have changed over time.
Between 2009 and 2011, the German government introduced short-time
work. Short-time work refers to publicly financed work-time reductions. It
enables firms to temporarily reduce their employees’ working hours instead
of firing them when labor demand is low. Short-time work was implemented
primarily in manufacturing, the most export-oriented branch of the
German economy and thus the most strongly affected by international mar-
kets during the crisis (Crimmann, Wießner, and Bellmann 2012). Workers
who were on short-time work were not eligible for WeGebAU-subsidized fur-
ther training. The FEA introduced another temporary program, however,
that subsidized further training for low-skilled employees during short-time
work. The requirements were the same but there were no wage subsidies
for firms, only cost reimbursement (Deeke 2009). Training duration could
not exceed the duration of short-time work. Subsidized training during
short-time work was only important in 2009, when about 25,000 workers of
the overall 30,000 participants took part.2 Thus, employers who use short-
time work are probably less likely to use the WeGebAU program. This
affects firms in the manufacturing sector in 2009 in particular. By contrast,
employers who did not use short-time work might have used the training
subsidy for labor hoarding. The firm’s industry and the timing of training
are therefore likely to affect the unconditional LPR.
Literature Review
The training literature offers several reasons for legitimate interventions in
further training activities by official institutions if there is an undersupply in
training (Booth and Bryan 2005). Moreover, a large and growing body of lit-
erature has investigated the determinants of (privately funded) firm-based
further training, for example, for the United States (Lynch 1992; Lynch
and Black 1998; Lerman, McKernan, and Riegg 2004) or Europe (Brunello,
Garibaldi, and Wasmer 2007). Trained workers are usually younger, male,
better educated, and employed full time. The training firms are relatively
large. By contrast, low-skilled workers participate in further training less
2
Numbers come from the 2018 statistics of the Federal Employment Agency (data warehouse).
often due to capital constraints (Leuven and Oosterbeek 1999; Bassanini

et al. 2007; Albert, Garcı́a-Serrano, and Hernanz 2010; Grund and Martin
2012; Fouarge et al. 2013).
The bulk of the literature on subsidized training is concerned with pro-
grams for unemployed workers (Card, Kluve, and Weber 2010, 2018;
Crépon and van den Berg 2016) and mostly concludes that training for the
unemployed yields positive gains in the long run.
A number of studies evaluate training programs that are open to both
employed and unemployed workers. The Chilean training voucher program
known as Bono Trabajador Activo (BTA) (Novella, Rucci, Vazquez, and
Kaplan 2018) covers the costs of training courses for workers who contribut-
ed to social securities for a certain minimum duration before applying for
the program. After five years, the program decreases employment probabili-
ty by 2 percentage points, but increases earnings by 5% for low-educated
workers. The U.S. Workforce Investment Act (WIA), particularly the WIA
Adult and WIA Displaced Worker program, target disadvantaged workers
with poor work histories or workers seeking job-search assistance (Barnow
and Smith 2015). In general, program participation benefits both WIA
adults and WIA displaced workers in terms of earnings and employment,
even though the effects, in particular for earnings, are smaller for the latter
(Hollenbeck 2009; Heinrich et al. 2013; Andersson et al. 2016). Training is
more beneficial during economic downturns because of the composition of
participants (Heinrich and Mueser 2014). Women profit more than men
do because they are trained in fields with higher returns, for example,
health care (Jacobson and Davis 2017).
In contrast to these studies, the literature on the returns of training subsi-
dies predominantly targeted at low-skilled employed workers provides
mixed evidence regarding earnings and take-up rates. Abramovsky et al.
(2011) did not find any effects of UK subsidies for low-skilled training on
firms’ or employees’ training take-up rates. By contrast, Görlitz (2010), who
evaluated the above-mentioned Bildungsprämie–German vouchers that par-
tially cover direct training costs, found positive effects. They ranged from 10
to 15% for the share of firms investing in training. Individuals receiving the
voucher participated in 1.04 more training courses (Görlitz and Tamm
2017). Providing additional information about these vouchers to workers,
however, did not increase training take-up at the worker level (Görlitz and
Tamm 2016). Hidalgo, Oosterbeek, and Webbink (2014) found that a ran-
dom distribution of training vouchers for low-skilled workers in the
Netherlands increased take-up rates by 44%. Also using an experimental set-
up, Schwerdt, Messer, Woessmann, and Wolter (2012) found an increase of
training take-up of 13 percentage points for workers of all skill groups in
Switzerland.
Evidence on the effects of subsidized training on income is also mixed.
The Bildungsprämie does not affect wages (Görlitz and Tamm 2016).
Hidalgo et al. (2014) also did not find any short-term wage effects, and
8 ILR REVIEW
Schwerdt et al. (2012) confirmed this result. They objected, however, that
workers with compulsory education, or whose highest educational degree is
one of vocational training, might have positive returns. Large effects were
detected for Sweden, where an additional year of adult education for low-
skilled workers increased annual earnings by 4.4% (Stenberg 2011).
Regarding the effects on employment, previous evidence is rather scarce.
Schwerdt et al. (2012) and Görlitz and Tamm (2016) did not find any
effects of training subsidies on workers’ employment. Dauth and Toomet
(2016) analyzed the impact of subsidized training on the employment dura-
tion of workers older than 45 years in small- and medium-sized enterprises
(SME) in Germany. They found improved employment among participants
of the subsidy program, which they attributed to the postponement of re-
tirement due to increased job satisfaction. Even though they did not look at
low-skilled workers but focused on a certain age group in SME, their analy-
ses are the most similar to this article, as the institutional implementation of
the subsidy is very similar and their analyses are based on the same adminis-
trative registers.
My article differs further from the ones noted above in various aspects.
First, I focus exclusively on employed low-skilled workers. Given that they
are not unemployed or do not necessarily have poor employment histories,
they differ from participants of the WIA and BTA with better labor market
attachments. Second, WeGebAU subsidizes training that needs the consent
of the employer because it takes place during working hours. It is therefore
much more linked to the current job than other training subsidies such as
the Bildungsprämie. Third, exploiting regional variation, I strike a new path
to identify causal effects compared to these previous studies. Measuring the
effect on compliers, that is, those who participate additionally due to a more
generous policy style, I evaluate what would happen should the government
decide to extend the program further. Fourth, contrary to previous
European studies that primarily evaluated program take-up rates and earn-
ings, I focus on employment, unemployment, and earnings. Fifth, studying
a large set of subgroups in order to unravel the training mechanisms, I put
a great deal of emphasis on program heterogeneity.
Empirical Approach
Instrumenting with Policy Styles
Regional variation in employment offices’ policy styles has been exploited
to evaluate ALMP instruments in recent studies (Frölich and Lechner 2010;
Lechner, Wunsch, and Scioch 2013; Boockmann, Thomsen, and Walter
2014; Doerr et al. 2014; Markussen and Roed 2014; Dean, Pepper, Schmidt,
and Stern 2015; Eppel 2017). In this study, agency-specific policy styles re-
flect the part of the program implementation that is solely due to local em-
ployment agencies’ unique features, which are independent from structural
or economic specifics. Knodt (1998) defined policy styles as persisting
differences in paradigms, problem-solving mechanisms, and cooperative be-

havior between agents. Adopting this idea, Doerr and Kruppe (2014) elabo-
rated on the exogeneity of conditional policy styles for the employment
agencies between 2005 and 2010. By combining unique survey data of case-
workers’ and managers’ assessments of a training voucher program with
German register data, they found that particularly cooperative behaviors
and high degrees of communication within employment agencies and with
firms determine policy styles.
Unlike previous studies that exploit local autonomy for the identification
of treatment effects, I cannot draw on survey data that capture concrete
details on the local policy styles (Boockmann et al. 2014; Doerr et al. 2014).
I can rely on qualitative evidence, however. In 2011, nine IAB experts locat-
ed in different employment agencies across Germany interviewed casework-
ers. The objective of this qualitative survey was to learn about the
implementation of the subsidy program. This involves, for example, infor-
mation on who initiates the first contact between employment agency and
employer/employee, who is involved in the decision-making process, and
how the decision is made regarding who is eligible for the subsidy. The in-
terview protocols illustrated that local employment agencies have different
styles regarding the implementation of the program.
First, differences occur regarding the organization within employment
agencies. Whereas in some agencies all caseworkers responsible for the con-
tact with firms are obliged to implement the program, other agencies have
specialists who process all program applications alone, and still other agen-
cies hire training counselors. These counselors are responsible for helping
caseworkers promote the program and for advising firms and workers on
the program. The FEA adapted the number of specialized caseworkers and
training counselors continuously over time according to the overall pro-
gram policy. From 2007 to 2009, the FEA pushed the program by increasing
advertising efforts and personnel. Enrollment peaked in 2009 with the fi-
nancial and economic crises. Starting in 2010, the FEA offered the program
less actively and decreased staff based on a report by the German Federal
Court of Auditors (Bundesrechnungshof 2009). Because of this report, local
employment agencies applied the eligibility criteria more strictly and accu-
rately documented the allocation of subsidies. Further organizational differ-
ences concern the handling of applications. Although some caseworkers
process further training applications by themselves, other caseworkers need
final consent from the head of the team or other superiors, and still other
caseworkers are responsible only for certain parts of the process (e.g.,
checking workers’ and firms’ eligibility or instructing payout).
Second, differences occur regarding the informal behavior and attitudes
of caseworkers. When granting a training subsidy for employed workers, case-
workers draw on the legal framework that is given by law, that is, the German
Social Code and the FEA’s rules of procedure (Geschäftsanweisungen and
Handlungsempfehlungen). Beyond these guidelines, caseworkers enjoy a
10 ILR REVIEW
certain level of discretion. This concerns, for example, their judgment on the
necessity of the further training course for the current job or for the occupa-
tion in general, which would justify a subsidy. Caseworkers also have discretion
when judging whether applicants are eligible for the subsidy. For example,
they must determine whether someone can be categorized as low skilled,
which—given workers’ employment histories—is not always trivial.
The financial resources for the further training of unemployed workers
are usually limited. Therefore, caseworkers thoroughly consider whether
training participation will be profitable for the worker based on the work-
ers’ abilities and motivation. Regarding employed workers, caseworkers nev-
er had to deal with budget constraints. The FEA annually provided an extra
200 million euros, which were never fully exploited. Consequently, expected
program outcomes for employed workers are less important for the case-
workers’ decisions regarding who should receive training.
In sum, organizational differences and caseworkers’ informal behavior af-
fect the personnel capacities of local employment offices, which in turn af-
fect how quickly and carefully applications are processed and how familiar
single caseworkers are with the program. Organizational differences do not
directly affect employment and earnings of workers, however, but only the
treatment probability, given that potential participants are employed. After
the subsidy program’s introduction in 2007, instructions for caseworkers for
the implementation of the program were not yet very specific, as internal
documents of the FEA reveal. Therefore, it is likely that employment agen-
cies had different interpretations of which firms and workers were eligible
for the program and which types of training could be subsidized. As a result,
some agencies were more prone to grant the subsidy than were other agen-
cies. Policy styles may have changed over time because the FEA adjusted the
caseworker staff, program content, and eligibility criteria over time and be-
cause caseworkers became more familiar with the program.
Local Average Treatment Effect (LATE) Framework

I consider participants entering the subsidy program between January 2007
and December 2010 and follow them over a period of up to five years. I esti-
mate the causal effect of compliers’ program participation on cumulative
earnings and employment duration, exploiting regional variation in the re-
sidual LPR of training subsidies as an exogenous instrument (see also
Angrist and Pischke 2009: 151–61). I consider the linear model
ð1Þ Yitq = a0i + a1i Titq + a2i Xitq + a3 Fft + a4 Aat + hitq
where Titq is a dummy that indicates subsidy recipience, Xitq controls for in-
dividual characteristics, and Fft controls for employer characteristics. Aat
denotes the labor market characteristics, including the composition of the
population and the workforce, that allow correction for regional, structural,
and economic differences. Observations at the individual level are indicated
by i, at the firm level by f, and at the agency district level by a; q indicates

observations by quarter and t by year. There remain hiq = M’itqgi + ni unob-
servable variables, such as Mitq, which might indicate workers’ ambitions for
which I cannot control. The effect of Mitq influences both the outcome Yitq
and the treatment indicator Titq, such that E(Titqhitq) 6¼ 0.
To estimate the causal effect of Titq on Yitq, I need an instrument for sub-
sidy program participation. I start by constructing the following variable
P
Tiatq
ð2Þ LPRatq = P i *100
i LSiat
for every German local employment agency district a per quarter q in year t.
Tiatq denotes a low-skilled employee who starts subsidized training in a given
quarter and agency district. LSiat indicates a low-skilled employee within an
agency district and is observable only on a yearly basis. Hence, LPRatq corre-
sponds to the unconditional local participation rate of low-skilled employees
in the subsidy program by quarter and agency district.
The unconditional LPR is by construction endogenous and thus invalid
as an instrument.3 The unconditional LPR is partially driven by regional la-
bor market conditions, employer, and worker characteristics:
ð3Þ LPRatq = b0i + b1i Xitq + b2 Fft + b3 Aat + sitq
These factors are also likely to impact individuals’ probabilities of partici-

pating in the subsidy program and participants’ labor market outcomes.
Therefore, I purge variation in the LPR from region-, establishment-, and
individual-level confounders. Consequently, I exploit only the remaining
variation in the probability of treatment between different agency districts
as an instrument. I refer to this residual variation as the policy style. Figure 1
displays the variation of the average residual LPR across German employ-
ment agency districts aggregated over 2007 to 2010, showing clear differ-
ences across local employment agencies.
Figure 2 displays binned scatter plots of the residual LPR and the proba-
bility to be treated. The graphs show that the relationship between the two
variables is quadratic rather than linear, also when dropping outliers. The
probability to be treated increases with the residual LPR, but at a decreasing
rate. Therefore, I create two instruments, Z1itq and Z2itq, that capture both
the linear and the quadratic relationship between the residual LPR and the
treatment probability.

ð4Þ Z 1itq = sitq = LPRatq b0i + b1i Xitq + b2 Fft + b3 Aat
3
The unconditional LPR is on average driven by the numerator. I run a standardized regression of the
LPR on the sum of subsidy participants and the sum of local low-skilled employees at the level of employ-
ment agencies. Increasing the number of participants (low-skilled employees) by one standard deviation
changes the LPR on average ceteris paribus by 0.93 (–0.49) standard deviations. However, the relative
importance of one or the other factor varies by year-quarter. Results are available on request.
12 ILR REVIEW
Figure 1. Average Residual Local Participation Rates (Policy Styles) from 2007 to 2010
by Employment Agency District
2

ð5Þ Z 2itq = ritq = LPRatq e0i + e1i Xitq + e2 Fft + e3 Aat
The implementation of the instrumental variable (IV) is accomplished by

using two-stage least squares (2SLS) estimation. In the first stage, I regress
the treatment indicator Titq, which takes the value 1 if a worker participates
in the subsidy program in a certain quarter, on the instruments Z1itq and
Z2itq. Then I regress the outcome on the predicted treatment probability.
This corresponds to regressing Titq on LPRatq, LPR 2atq, and control variables
Xitq, Fft, and Aat in the first-stage regression and including the same set of
control variables in the second-stage regression.
ð6Þ Titq = g0i + g1i Z 1itq + g2i Z 2itq + vitq

2
= d0i + g1i LPRatq + g2i LPRatq + d1i Xitq + d2i Fft + d3i Aat + vitq
= T^ itq + vitq
with d0i = g0i g1i b0i g2i e0i , d1i = g1i b1i + g2i e1i , d2i = g1i b2 + g2i e2 , and
d3i = g1i b3 + g2i e3 : g1i and g2i capture the heterogeneous effects of the residu-
al LPR, that is, the policy style, on the treatment probability across individuals.
Figure 2. Binned Scatterplots of the Treatment Probability and the Conditional Local
Participation Rate (LPR) with Linear and Quadratic Regression Line
a) All observations
Binned scatterplot with linear regression line Binned scatterplot with quadratic regression line
.5
.5
Treatment probability in shares

.4
.4
.3
.3
.2
.2
.1
.1
0
0
-.1 0 .1 .2 .3 .4 -.1 0 .1 .2 .3 .4
Conditional local participation rate in percentage Conditional local participation rate in percentage
b) Dropping the upper 5% outliers

Binned scatterplot with linear regression line Binned scatterplot with quadratic regression line
.5
.5

.4
.4
.3
.3
.2
.2
.1
.1
0
0
0 .05 .1 .15 .2 0 .05 .1 .15 .2

Conditional local participation rate in percentage Conditional local participation rate in percentage
Substituting Equation (6) into Equation (1) in the second step yields a re-
gression of the outcome of choice Yitq on the predicted treatment probabili-
^ itq and the same set of control variables as in the first stage.
ty T

ð7Þ Yitq = a
~ 0i + a ^itq + a
~ 1i T ~ 2i Xitq + a
~ 3 Fft + a
~ 4 Aat + hitq + a1i vitq
Thus, T^itq from Equation (6) is, by construction, initially correlated with re-
gional, establishment, and personal characteristics. Once included in the second-
stage Equation (7), the additional controls purge T^ itq from this correlation.
The resulting coefficient a ~ 1i reports the local average treatment effect
(LATE) of participation for all compliers.4 When interpreting the results,
4
One can distinguish among four different groups in the LATE framework: Always-takers participate in
the program irrespective of the policy style. Compliers participate only in agency districts that are condi-
tionally more prone to grant further training subsidies. Never-takers never participate, whereas defiers par-
ticipate only in districts less prone to grant subsidies. The monotonicity assumption (see section LATE
Assumptions) excludes the existence of defiers.
14 ILR REVIEW
keep in mind that the effect I estimate for compliers is different from the
usually obtained average treatment effect on the treated (ATET), which is
the combined effect for always-takers and compliers. To understand who
compliers are, consider the following scenario: Two people, A and B, work
in different employment agency districts. They have similar personal charac-
teristics and work in firms with similar characteristics that operate in regions
with similar characteristics. Person A participates in the program because
the employment agency of his district uses the program frequently. Person
B does not participate in the program because the employment agency of
his district uses the program infrequently. The effect for compliers mea-
sures the extent to which person A profits from participation compared to
person B who does not participate.
LATE Assumptions
Policy styles are positively correlated with the probability of participating in
the program but are not directly connected to participants’ employment or
earnings. Thus, the instrument purges the treatment effects of confounders
that might simultaneously affect both the individual outcomes and the prob-
ability of subsidization. However, the quality of the instrument hinges on
several important conditions.
First, to avoid the problem of weak instruments, the instrument should
have sufficient explanatory power. In a later section (The Baseline Model),
I will show that this assumption is fully met.
Second, policy styles must be independent of unobservable confounding
factors at the agency, establishment, and worker levels. Such a correlation
might arise if a certain policy style attracts certain workers or firms or if cer-
tain workers or firms drive the instrument. The former scenario can be ex-
cluded because it is unlikely that workers or firms relocate to regions with
specific policy styles (which are likely unknown to them). The latter scenar-
io is more likely because very motivated workers or firms might actively seek
further training subsidies from local employment agencies, which would
then drive the LPR. Table A.12 in the Supplemental Online Appendix
shows that the LPR is uncorrelated with most worker and firm characteris-
tics. It is affected by variables that represent skill, however, such as school-
ing, type of vocational degree, and being an unskilled blue-collar worker.
This impact is not very surprising, given that the subsidy program targets
low-skilled workers. Moreover, workers with professions in manufacturing
drive the LPR upward, whereas workers with positions in the restaurant, se-
curity, and cleaning industries affect the LPR negatively. Other variables at
the individual level, for example, gender, age, nationality, and variables that
present the employment history, are uncorrelated with the LPR. Larger
firms with human resources departments, which are probably better in-
formed about available subsidies, affect the LPR positively. By contrast, in-
dustry, firm age, or the skill composition inside firms is uncorrelated with
the LPR. The richness of the register data allows me to account for numer-
ous potential confounders and to create conditional independence.
Third, there should not be any direct correlation between policy styles
and employment or earnings because this would violate the exclusion re-
striction. Regarding the validity of the exclusion restriction, recall that I ex-
ploit policy styles concerning a program that addresses employed rather
than unemployed workers. The underlying subsidy program is the only FEA
training program directed at employed workers. The primary task of em-
ployment agencies is the integration of unemployed workers, even though
employment agencies are obliged to counsel both employed as well as un-
employed workers.
To find out to what extent this might pose a problem, I conducted sepa-
rate analyses based on a 2% random sample of German workers who were
employed subject to social security contribution on June 30. As Table 1
shows, approximately 0.1% of all employed workers seek counsel from the
employment agency. The main reason for contact between employed work-
ers and employment agencies is to register job seeking at least three months
before their (usually temporary) employment contract ends, which they are
obliged to do. This type of contact takes place for approximately 2% of all
employees. Thus, little interaction occurs between employees and the local
employment agencies, which could thread the validity of the instrument.
This bias is limited, however, and it should be even lower for workers with a
firm tenure of at least two years. These workers should, according to
German law, have permanent employment contracts and are therefore un-
likely to register job seeking. Therefore, any FEA actions or policies should
have no—or only very limited—direct effects on the employment durations
or earnings of employed workers, except through the incidence and fre-
quency of subsidized training.
Fourth, monotonicity requires that employed workers within an employ-
ment agency district react in the same way when the instrument takes a
higher value. Thus, a higher residual LPR makes workers strictly more likely
to participate. Consequently, workers who receive subsidized training in em-
ployment agencies with low residual LPRs must also receive subsidized train-
ing in employment agencies with higher LPRs. As outlined earlier,
employment agencies’ policy styles vary due to differences in the organiza-
tion and the informal behavior of caseworkers. Agencies without specialized
WeGebAU staff might be less sure about the implementation of the pro-
gram and thus stick to subsidizing workers who can easily be identified as el-
igible workers. For example, this is the case if workers are unambiguously
low skilled and have a clear necessity for further training to keep the cur-
rent job or for the occupation in general. In that sense, employment agen-
cies, which may be prone to give away the subsidy and which potentially
may be more likely to subsidize disputable cases, should also subsidize those
workers whose program eligibility is easy to identify.
16 ILR REVIEW
Fifth, the stable unit treatment value assumption (SUTVA) requires that
individual decisions to participate in the program do not affect other indivi-
duals’ labor market chances. The training subsidy program is rather small
compared to other ALMP instruments, and the mean share of treated work-
ers in the workforce per participating firm is approximately 3.5% in the
sample, thus this assumption very likely holds in the underlying case.
Data, Variables, and Sample Selection

Data
The analyses are based on administrative records drawn from the
Integrated Employment Biographies (IEB) V11.00.00. The IEB data are pro-
vided by the German Institute for Employment Research and document the
employment careers of all individuals liable for social security contributions
(approximately 80% of the German workforce). Data provide information
on benefit receipts, job searches, and participation in active labor market
policies. These data are process generated and highly reliable (Dorner,
Heining, Jacobebbinghaus, and Seth 2010). From these records I draw in-
formation on gender, age, nationality, schooling and vocational degree, oc-
cupation, blue- or white-collar status, tenure since January 2000, and other
variables in the employment history for one, three, five, and seven years pri-
or to treatment. The latter comprises periods in employment, welfare and
UI benefit receipt, unemployed job-seeking periods, and participation in
previous subsidized training.
The IEB data are merged with data from three other sources. The
Establishment History Panel (EHP) includes the universe of German estab-
lishments employing at least one worker liable for social security contribu-
tions (Hethey-Maier and Seth 2009). As these data are of the same
administrative origin as the IEB data, they have the same high reliability.
From these records, I draw information on firm age, size, and workforce
composition in terms of gender, age, and qualification. Moreover, I add re-
gional data on the population (density, share of women, age structure)
from the Federal Statistical Office and data on the composition of employ-
ees (age and skill structure, employer’s size, industry structure) at the agen-
cy level from the Labor Placement Statistics.
For the analysis, I identify all low-skilled, first-time participants entering
subsidized further training between 2007 and 2010 and the type of subsidy,
that is, wage subsidies or reimbursement of training costs. The correspond-
ing numbers based on the final sample are displayed in Table 4. Given that
nearly 60% of all participants received a combination of wage subsidies and
reimbursements, I adjust for parallel treatment spells in the empirical analy-
ses by counting workers receiving both measures only once. The potential
bias from subsequent treatment spells should be low because only approxi-
mately 9% of all participants had a second treatment spell at some later
point. From the resulting sample, I drop apprentices, part-time workers,
Table 4. Inflows to the Subsidy Scheme for the Adjusted Sample by Legal Basis
Year Overall Among those in: Cost reimbursement (%) Wage subsidy (%)
2007 11,368 60.03 90.06

2008 20,199 76.77 89.61
2009 31,643 85.38 76.20
2010 11,861 91.28 66.46
Total 75,071 80.16 80.37
and workers outside the age range of 25 to 65 years. Finally, I drop all work-
ers from the Bochum employment agency district, as this agency reported
an extremely high share of low-skilled participants relative to all low-skilled
employees in that district in the fourth quarter of 2007 for no obvious
reason.
I create a quarterly panel for the years 2007 to 2010. I calculate all con-
trol variables relative to the first day of each quarter. Outcome variables are
calculated relative to the last day of each quarter. Table 5 summarizes how
the outcome variables are defined.5 For the treated workers, I pick the em-
ployment sequence that leads to the first treatment. For the comparison
workers, I pick a random employment sequence, that is, subsequent em-
ployment quarters at a given employer. This is the data set I use for the esti-
mation of the dynamic treatment effects presented in the Supplemental
Online Appendix material. For the static estimations I keep only one ran-
dom observation among control workers and the observation of program
start among the treated workers for computational reasons. This trims the
sample size and increases variation compared with keeping multiple ran-
dom observations for a subset of workers.
Sample Selection
Three sources of potential selection into the subsidy program include
regions, firms (establishments), and workers.6 As discussed earlier, it is also
likely that the LPR is correlated with a number of these confounding
variables.
Table 6 shows that worker-level selection into the program is likely.7
Men and foreign workers are over-represented in the treatment group.
More than twice as many workers without a vocational degree (37%) and
with lower educational levels are in the treatment group. Concerning
5
Table A.5 in the Supplemental Online Appendix compares the outcome means by treated and poten-
tial comparison workers.
6
See also Grund and Martin (2012) for a discussion of further training determinants at the individual,
job, and firm levels.
7
The complete individual, establishment, and regional characteristics are available in the
Supplemental Online Appendix (Tables A.2–A.4).
18 ILR REVIEW
Table 5. Definition of Outcome Variables
Employment Unemployment Log earnings
Sum of days in Sum of days in non-employment Logarithm of the average

employment liable to while receiving benefits or unconditional daily wage, i.e.,
social security counseling from the FEA or the sum of days in employment
contributions participating in a program of multiplied by the daily wage and
ALMP divided by the number of days
within a given time period
Notes: All outcome variables are calculated over a given period starting after the last day of the quarter
of potential treatment. The periods are 365 days (over 1 year), 730 days (over 2 years), 1,095 days (over
3 years), 1,460 days (over 4 years), and 1,825 days (over 5 years). ALMP, active labor market policies;
FEA, German Federal Employment Agency.
occupational groups, subsidized workers are over-represented in

manufacturing, transportation, and logistics but under-represented in man-
agement and organization. Treated people have longer tenure and employ-
ment durations than do people in the control group in the five years before
treatment start. However, they collect lower earnings in the year before treat-
ment (74 vs. 85 euros per day) and spend more time in unemployment.
Establishments that use the subsidy program differ from other firms, par-
ticularly in terms of firm size, industry code, workforce, and economic situa-
tion. Table 6 shows that participating individuals tend to be employed in
larger establishments with higher shares of low-skilled workers. They work
in firms that grow more slowly on average. Moreover, firms in transporta-
tion, production, and economic services are more likely to use the subsidy.
Another crucial factor is implementation at the regional level of employ-
ment agencies. Participants work in less densely populated regions with
slightly lower unemployment rates. Other structural differences are eco-
nomically unimportant.
Results
The Baseline Model
This section discusses the results of the econometric analysis. Because the
underlying data lack information on privately funded training, I am interest-
ed only in the effects of the public training subsidies rather than the actual
programs. I estimate whether public subsidies for certain training courses
have any effect on the employability of the participants.8 Throughout the
analyses, I do not distinguish between the two components of wage subsidy
and cost reimbursement, but estimate a combined effect for program
8
The propensity scores for program participation of treated and control workers overlap mostly. Only
37 observations fall outside the common support in the baseline specification. Therefore, I do not ad-
dress the potential common support problem further.
Table 6. Selected Worker, Establishment, and Regional Characteristics
Treated Comparisons Difference p value
Female 0.21 0.35 20.13 0.00

Age 40.20 42.20 22.00 0.00
Foreign 0.16 0.09 0.07 0.00
Degree info missing 0.01 0.05 20.04 0.00
No degree 0.37 0.14 0.23 0.00
Vocational degree 0.55 0.58 20.03 0.00
A-levels 0.02 0.02 0.00 0.00
A-levels and vocational degree 0.03 0.08 20.05 0.00
Polytechnic degree 0.01 0.05 20.04 0.00
University degree 0.01 0.08 20.07 0.00
Profession in manufacturing 0.17 0.08 0.09 0.00
Profession in medical and non-medical health care 0.04 0.07 20.03 0.00
Profession in management and organization 0.06 0.17 20.11 0.00
Profession in transportation and logistics 0.26 0.11 0.15 0.00
Tenure without interruption since 1/2000 1,683.93 1,506.93 177.00 0.00
Employment in prior 5 years 1,544.76 1,514.48 30.28 0.00
Unemployed job search in prior 5 years 122.85 103.25 19.60 0.00
Average daily wage conditional on employment 73.99 84.81 210.82 0.00
in prior 5 years
Firm size 1–25 workers 0.16 0.30 20.14 0.00
Firm size .500 workers 0.26 0.20 0.06 0.00
0–5% low-skilled workers in firm 0.26 0.46 20.21 0.00
. 5–10% low-skilled workers in firm 0.14 0.16 20.02 0.00
. 10–20% low-skilled workers in firm 0.24 0.18 0.05 0.00
. 20% low-skilled workers in firm 0.37 0.19 0.17 0.00
Firm growth in prior 3 years in percentage (%) 74.27 232.57 2158.30 0.00
Farming, forestry, fishing 0.01 0.01 20.01 0.00
Production 0.42 0.25 0.16 0.00
Trade 0.08 0.14 20.06 0.00
Transportation and storage 0.14 0.04 0.08 0.00
Other economic services 0.12 0.07 0.05 0.00
Health and welfare 0.06 0.09 20.03 0.00
Population density per square km 556.91 738.55 2181.64 0.00
Unemployment rate 8.70 9.40 20.70 0.00
Total 75,071 296,510

Notes: The full list of control variables is available in Tables A.2 to A.4 in the Supplemental Online
Appendix material.
participation. Because training costs are generally borne by the employer, both
components affect the same subject, that is, the firms’ training decisions.9
Table 7, column (1) shows the most parsimonious specification, control-
ling for quarter dummies that account for the timing of treatment and re-
gional characteristics.10 The latter include the district unemployment rate
9
Moreover, separate analyses for the two components provide similar insights (see Supplemental
Online Appendix Tables A.10 and A.11).
10
For the purposes of organized presentation, I indicate the variables included in the regressions but
do not display their coefficients.
20 ILR REVIEW
Table 7. LATE Estimates for Participation in the Subsidy Program on Cumulative

Employment within Two Years
(1) (2) (3) (4) (5)

2SLS 2SLS 2SLS 2SLS OLS
Treated 52.035*** 30.542*** 24.082*** 23.583*** 33.802***

(4.59) (4.21) (4.36) (4.29) (1.30)
Regional characteristics
Unemployment rate Yes Yes Yes Yes Yes
Distribution of employees Yes Yes Yes Yes Yes
Population characteristics Yes Yes Yes Yes Yes
Firm characteristics and occupation — Yes Yes Yes Yes
Worker characteristics
Sociodemographic characteristics and — — Yes Yes Yes
short employment history
Long employment history — — — Yes Yes
First-stage results, dependent

variable: Treatment
LPR 1.969*** 1.755*** 1.476*** 1.466***
LPR2 20.903*** 20.810*** 20.730*** 20.725***
F-test of excl. instr. 422.100 397.861 293.544 298.618
R-squared 0.143 0.222 0.341 0.346
N 371,581 371,581 371,581 371,581 371,581
N (participants) 75,071 75,071 75,071 75,071 75,071

Notes: All regressions include a constant. The first-stage regressions include the same set of control
variables as the corresponding second stage in the upper panel. To control for the timing of program
start, all regressions include interaction terms of quarter and year dummies. Distribution of employees is
reported by age, skill, firm size, and industry. Population characteristics comprise the population density
(also by gender/age groups) on the level of local employment agency districts and the state. Firm
characteristics comprise firm size and age, industry, and workforce skill composition. Sociodemographic
characteristics include gender, age, nationality, schooling degree, vocational degree, and job position.
Short employment history variables are calculated for the past 1 and 3 years and long employment history
variables for the past 5 and 7 years. They include indicators for past employment, tenure, benefit and
welfare periods, unemployed job search periods, previous participation in subsidized further training,
average daily wage, and benefits. Standard errors (in parentheses) are clustered at the level of 175 local
employment agency districts. OLS, ordinary least squares; LPR, local participation rate; 2SLS, two-stage
least squares.
Significance level: ***1%; **5%; *10%.
(to roughly control for regional labor market characteristics and regional la-
bor supply and demand); the composition of all individuals living within a
regional employment agency district in terms of density, gender, and age;
and variables that control for the composition of the workforce within an
agency district. The first-stage results reported in the bottom panel imply
that the LPR and LPR2 of employment agency districts have strong correla-
tions with treatment. The F-test statistic of the excluded instruments is well
above conventional threshold levels. Turning to the second-stage results, I
find that participation in the subsidy program has a positive and significant
impact of approximately 52 days (seven weeks) on compliers’ cumulative
employment duration over a period of two years.
In column (2), I include a large set of firm characteristics, because fac-

tors such as firm size and age, workforce composition, and industry are im-
portant determinants for firms’ training investments and the operational
need for training as well as for workers’ average employment durations.
Thus, these variables potentially affect the LPR, the treatment probability,
and workers’ employment outcome. As a consequence of including these
characteristics, the positive effect and the first-stage coefficients decrease sig-
nificantly. Finally, I gradually add control variables for individual character-
istics, in particular, sociodemographic controls and variables that reflect
both the employment career and any unobservable personal traits, as sug-
gested by Caliendo, Mahlstedt, and Mitnik (2017) in a similar setup. The ef-
fect on employment decreases to 24 days on compliers’ cumulative
employment over two years.
The lower panel shows that the first-stage coefficients remain highly sig-
nificant and do not change further when adding more controls for employ-
ment histories. Column (4) is the preferred benchmark specification in the
following analysis, as it contains the most important control variables. For
this model, I also report the results of a corresponding OLS regression in
column (5). Comparing the coefficients of columns (4) and (5) shows that
the OLS regression generates a significant positive effect of 34 days more
employment and the LATE a positive effect of 24 days more employment
over a two-year period. This indicates that the OLS coefficient might be
overstated.
The preferred specification above contains a large set of control variables
to purge the LPR from potential confounders. Yet, potentially important
factors that I cannot control for may still impact the LPR. Personality traits,
for example, might affect the LPR positively, when I assume that more moti-
vated workers actively initiate the program. This factor might affect the va-
lidity of the instrument. I expect the bias to be small, however. After having
controlled for regional and firm characteristics, increasing the number of
control variables for individual characteristics, in particular in the employ-
ment history, changes the first-stage coefficients only slightly, as a compari-
son of columns (3) and (4) shows.
Additional Labor Market Outcomes

The previous section showed that participation in the subsidy program
affects employment liable for social security contributions in the two years
after treatment. Because the data end on December 31, 2012, I can observe
individuals over different periods: the longest period, five years, is for work-
ers who started participation in 2007 and the shortest period, two years, is
for workers who started participation in 2010. Table 8 shows that the effect
on employment is steadily increasing over time to approximately 90 more
days of employment for treated workers within five years.
22 ILR REVIEW
Table 8. LATE and OLS Estimates for Participation in the Subsidy Program on
Cumulative Employment, Cumulative Unemployment,
and Log Earnings (Daily Average)
(1) (2) (3)

Employment Unemployment Log earnings
2 SLS OLS 2 SLS OLS 2 SLS OLS
Over 1 year 14.346*** 19.112*** 25.854*** –8.262*** 0.072*** 0.084***

(2.03) (0.59) (1.62) (0.52) (0.01) (0.00)
Over 2 years 23.583*** 33.802*** 29.288*** –13.775*** 0.075*** 0.089***
(4.29) (1.30) (3.30) (1.05) (0.02) (0.00)
Over 3 years 30.932*** 47.938*** 212.523** –20.140*** 0.083*** 0.096***
(8.06) (2.04) (6.01) (1.64) (0.02) (0.00)
Over 4 years 54.307*** 70.373*** 227.924*** –30.538*** 0.114*** 0.112***
(12.74) (4.13) (7.42) (2.83) (0.02) (0.01)
Over 5 years 92.824*** 86.760*** 244.544*** –37.804*** 0.134*** 0.116***
(20.25) (7.99) (13.30) (5.11) (0.04) (0.01)
First-stage results
1) LPR N 1) LPR N 1) LPR N
2) LPR2 2) LPR2 2) LPR2
3) F-test 3) F-test 3) F-test
Over 1 and 2 years 1) 1.466*** 371,581 1) 1.466*** 371,581 1) 1.473*** 365,236
2) –0.725*** 2) –0.725*** 2) –0.729***
3) 303.686 3) 303.686 3) 298.704
Over 3 years 1) 1.411*** 297,697 1) 1.411*** 297,697 1) 1.417*** 293,434
2) –0.693*** 2) –0.693*** 2) –0.696***
3) 294.375 3) 294.375 3) 294.560
Over 4 years 1) 2.134*** 175,437 1) 2.134*** 175,437 1) 2.143*** 173,253
2) –1.795*** 2) –1.795*** 2) –1.800***
3) 761.402 3) 761.402 3) 753.285
Over 5 years 1) 2.297*** 74,384 1) 2.297*** 74,384 1) 2.301*** 73,636
2) –2.051*** 2) –2.051*** 2) –2.057***
3) 349.293 3) 349.293 3) 353.792

Notes: LPR: Effect of residual local participation rate (LPR) on treatment dummy.
All outcome variables are calculated as described in Table 5. All regressions include the same set of
control variables as in Table 7. The first-stage regressions include the same set of control variables as
the corresponding second-stage regressions. Standard errors clustered at the level of 175 local
employment agency districts in parentheses. LATE, local average treatment affect; OLS, ordinary least
squares; 2SLS, two-stage least squares.
Outcomes are measured starting at the end of the quarter of potential

program start. Thus, short training courses of only a few days might already
be over before I begin measuring the outcome. By contrast, longer training
courses might still be ongoing when I begin measuring the outcome.
Positive employment effects could then be the consequence of workers be-
ing locked in the current employment relationship because they still receive
subsidized training. As shown earlier, however, training has a median dura-
tion of 75 days and many courses end before the outcome variable is mea-
sured. Moreover, as employment effects are persistent and increase over the
years, they must be the causal result of program participation and not solely
due to the described ‘‘lock-in effect.’’
A second outcome considered in column (2) is cumulative days of unem-
ployment. I define unemployment as a period during which a worker is
non-employed and receives benefits or counseling from the FEA or partici-
pates in a program of active labor market policy. Compared to employment,
the effect on unemployment is less pronounced. A steadily increasing signif-
icant negative effect is seen on unemployment, indicating that complying
program participants are approximately 45 days less unemployed within the
first five years. Thus, more employment for compliers does not automatical-
ly translate into the same amount of less unemployment. Consequently, the
program causes employment for some workers who otherwise would
have dropped out of the social security records, for example, due to self-
employment, retirement, or withdrawal from the labor market. Further
analyses reveal that female rather than older workers drive this shift.
Finally, to see how the economic situations of compliers translate into
earnings, I consider cumulative earnings as an outcome. For this, I calculate
the average unconditional daily wage as described in Table 5. Participants’
gains in earnings from the program are relatively high. In the first year after
treatment start, the gain in earnings already amounts to 7% and increases
to 13% within five years.
A direct comparison of the OLS and IV estimates is possible only if the
treatment effects are constant across all participants and if the average treat-
ment effect on the treated is similar to the LATE. Here, the OLS coeffi-
cients are higher in most cases. This implies that OLS either cannot fully
control for the positive selection of workers into the subsidy program or
that the subgroup of compliers gains less from the subsidy program than
always-takers.
Robustness Checks
To verify whether unobservable confounders affect the instrument and thus
the validity of the empirical approach, I conduct a number of robustness
checks. Table 9 and Table 10 summarize the findings on employment and
earnings. A look at the first-stage results reveals that throughout all robust-
ness tests, the residual LPRs are hardly affected. This finding strongly sup-
ports the validity of the instrument and suggests that the model includes all
relevant confounders.
Labor Market Fixed Effects

If the regional controls for agency districts insufficiently account for struc-
tural and economic differences, unobservable confounding factors of pro-
gram participation at the agency level are correlated with the residual LPRs.
In an alternative specification, I therefore control for labor market fixed
effects, exploiting only variations in the residual LPRs that occur within the
Table 9. Robustness: 2SLS Estimates for Participation in the Subsidy Program on Employment
(2) (3) (4) (5) (6) (7) (8) (9)

(1) Labor market Without Firm Only firms with Only one program Health, marital status, 25–50 25–55
Baseline FE manufacturing growth subsidized training participation and children years old years old
Over 1 year 14.346*** 15.198*** 15.912*** 13.647*** 12.727*** 13.576*** 15.420*** 15.582*** 15.502***
(2.03) (2.10) (3.82) (2.10) (2.65) (2.14) (2.02) (2.17) (2.01)
Over 2 years 23.583*** 26.640*** 25.962*** 21.966*** 18.846*** 21.466*** 26.431*** 24.893*** 24.926***
(4.29) (4.49) (6.98) (4.77) (6.11) (4.55) (4.13) (4.49) (4.29)
Over 3 years 30.932*** 37.241*** 40.331*** 27.111*** 24.449** 27.764*** 36.913*** 35.772*** 34.478***
(8.06) (7.97) (11.19) (8.86) (11.21) (8.41) (7.49) (8.08) (8.30)
Over 4 years 54.307*** 63.427*** 50.000*** 42.607*** 53.635*** 49.383*** 54.029*** 64.430*** 68.302***
(12.74) (13.55) (17.96) (14.29) (14.57) (13.38) (12.00) (12.93) (12.72)
Over 5 years 92.824*** 83.706*** 77.839** 81.579*** 102.507*** 81.355*** 86.814*** 97.952*** 98.962***
(20.25) (23.78) (32.39) (22.68) (25.55) (22.41) (18.69) (21.03) (21.03)
First-stage results (Over 1 and 2 years)

LPR 1.466*** 1.444*** 1.327*** 1.455*** 1.484*** 1.413*** 1.464*** 1.487*** 1.487***
(0.06) (0.06) (0.07) (0.06) (0.08) (0.05) (0.06) (0.06) (0.06)
2
LPR –0.725*** –0.732*** –0.847*** –0.719*** –0.748*** –0.689*** –0.725*** –0.758*** –0.747***
(0.05) (0.06) (0.12) (0.04) (0.05) (0.04) (0.05) (0.05) (0.05)
N (year 1 & 2) 371,581 371,581 264,940 331,831 129,791 365,400 371,581 287,672 332,487

Notes: Baseline control variables as in Table 7. The first-stage regressions include the same set of control variables as the corresponding second-stage regressions. Standard
errors (in parentheses) are clustered at the level of 175 local employment agency districts. FE, fixed effects; LPR, local participation rate; 2SLS, two-stage least squares.
Table 10. Robustness: 2SLS Estimates for Participation in the Subsidy Program on Log Earnings
(2) (3) (4) (5) (6) (7) (8) (9)

(1) Labor Without Firm Only firms with Only one program Health, marital 25–50 25–55
Baseline market FE manufacturing growth subsidized training participation status, and children years old years old
Over 1 year 0.072*** 0.072*** 0.062** 0.072*** 0.041** 0.066*** 0.078*** 0.076*** 0.077***
(0.01) (0.02) (0.03) (0.02) (0.02) (0.02) (0.01) (0.02) (0.02)
Over 2 years 0.075*** 0.078*** 0.070*** 0.070*** 0.031 0.069*** 0.083*** 0.081*** 0.080***
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02) (0.01) (0.02) (0.02)
Over 3 years 0.083*** 0.091*** 0.096*** 0.075*** 0.036 0.076*** 0.094*** 0.093*** 0.091***
(0.02) (0.02) (0.03) (0.02) (0.03) (0.02) (0.02) (0.02) (0.02)
Over 4 years 0.114*** 0.122*** 0.102*** 0.101*** 0.068** 0.102*** 0.113*** 0.118*** 0.124***
(0.02) (0.03) (0.03) (0.03) (0.03) (0.02) (0.02) (0.02) (0.02)
Over 5 years 0.134*** 0.134*** 0.111** 0.122*** 0.094** 0.111*** 0.128*** 0.135*** 0.144***
(0.04) (0.04) (0.05) (0.04) (0.04) (0.04) (0.03) (0.04) (0.03)
First-stage results (Over 1 year)

LPR 1.475*** 1.454*** 1.339*** 1.465*** 1.472*** 1.423*** 1.473*** 1.495*** 1.494***
(0.06) (0.06) (0.07) (0.06) (0.08) (0.06) (0.06) (0.06) (0.06)
2
LPR –0.731*** –0.739*** –0.853*** –0.725*** –0.743*** –0.695*** –0.730*** –0.763*** –0.752***
(0.05) (0.06) (0.11) (0.04) (0.05) (0.04) (0.05) (0.05) (0.05)
N (year 1) 362,666 362,666 257,701 324,105 128,295 356,490 362,666 281,336 325,326

Notes: Baseline control variables as in Table 7. The first-stage regressions include the same set of control variables as the corresponding second-stage regressions. Standard
errors (in parentheses) are clustered at the level of 175 local employment agency districts. FE, fixed effects; LPR, local participation rate; 2SLS, two-stage least squares.
26 ILR REVIEW
same labor market. Following the classification by Kosfeld and Werner

(2012), I identify 141 local labor markets for Germany. Those markets are
characterized by close commuter links and high seclusion from other re-
gional labor markets. Local labor markets are based on aggregations of 402
counties. Because agency districts are not based on aggregated counties, la-
bor markets and agency districts are not nested but overlapping, enabling
the fixed effects estimation. In both Table 9 and Table 10, column (2)
shows that the LATE estimates on employment are generally larger, but the
overall effects on earnings are nearly identical. More important, the first
stage is almost unaffected, suggesting that the applied regional controls suf-
ficiently purge the instrument of economic and structural components.11
Dropping Workers in Manufacturing

As discussed previously, short-time work was a popular instrument to hoard
workers during the economic downturn, in particular in 2009 and for firms
in manufacturing. The existence of short-time work and the possibility for
low-skilled workers to receive subsidized training during short-time work
might coincide with unobserved interactions between firms and local em-
ployment agencies. To determine if this is relevant, I drop workers in
manufacturing from the sample. Column (3) shows that the effects on em-
ployment and earnings remain relatively constant in the short run. The
first-stage coefficients change at the first decimal place. Thus, among all
specifications, this specification is the most conservative because the first stage
is the most affected. Even though there seem to be unobserved confounders
in the manufacturing sector, the overall impact is still rather limited.
Including Employee Growth

Firms’ economic performance or expected mass layoffs potentially affect
the employers’ decisions to claim subsidized training, which might drive the
LPR. Column (4) shows that the first stages remain nearly constant. The
coefficients on earnings and employment become slightly smaller, indicat-
ing that firm performance is not a relevant factor for the LPR.
Dropping Firms That Do Not Use Subsidized Training

Firms’ tendency to use public subsidies might be correlated with unobserv-
able characteristics that also affect the LPR. Limiting the sample to workers
from firms that have at least one employee who received subsidized train-
ing, I again find that the first stage changes very little, which supports the va-
lidity of the instrument. Column (5) shows that the coefficients on earnings
11
Table A.8 in the Supplemental Online Appendix supports this conclusion. The residual LPR remains
stable with the subsequent addition of regional controls. This confirms that potential remaining local
confounding variation in the baseline model, which might drive unobserved selection into treatment, is
irrelevant.
become significantly smaller and partially insignificant in the short run, sug-
gesting that the subgroup of firms that uses training subsidies is selective.
One explanation for the coefficients on earnings becoming smaller is that
workers profit less from program participation because coworkers might al-
so be trained but without subsidies. Another explanation is that these firms
work in branches where gains in earnings can only be realized in the medi-
um and long run.
Dropping Workers with Multiple Treatment Spells

Approximately 9% of the treated workers participate in the subsidy program
a second time at some point later, which could be an outcome of the first
participation. To see how this affects the validity of the instrument and pro-
gram effectiveness, I conduct another test and restrict the sample to workers
who participate only a single time in the observation period. As before, the
first-stage coefficients are only slightly affected by this restriction. As one
can expect, the program effectiveness decreases somewhat compared to the
baseline specification: employment declines by 10 days and earnings by 2
percentage points within five years.
Including Variables on Health, Marital Status, and Children

Workers’ labor market participation is affected by their health status.
Particularly for women, the existence of children often involves care respon-
sibilities and marital status affects the preference for having one’s own in-
come. To determine whether these factors also affect LPRs, I include
additional variables in a separate regression.12 Column (6) shows that the
first stages are almost identical to the baseline specification and that the
coefficients remain very comparable, which implies that health and the fam-
ily status are irrelevant factors for the local policy style.
Dropping Workers Older Than Age 50/55

Finally, I am interested in how workers at the upper edge of the age distri-
bution who are relatively close to retirement affect the results. I conduct
two further robustness checks, limiting the sample to workers between 25
and 50, and 25 and 55 years, respectively. Columns (7) and (8) show that
the first stages as well as the coefficients on employment and earnings vary
only slightly. Thus, workers’ age is not a relevant factor for the local policy
style.
12
Information on health, marital status, and the existence of children under the age of 15 is only avail-
able for a selective subset of workers in the sample, that is, workers who registered as job seeking at least
once since January 2000. I create extra variable categories for the missing values in order not to lose
observations.
28 ILR REVIEW
Figure 3. LATE and OLS Estimates for Participation in the Subsidy Program
by Cohort of Treatment Start

Notes: Outcome variables as in Table 5. All regressions include the same set of control variables as in
Table 7. The first-stage regressions include the same set of control variables as the corresponding
second-stage regressions. First-stage results: LPR [LPR2] (F-test) values for employment within 1 year:
cohort 2007: 2.297*** [22.051***] (344.620), cohort 2008: 1.936*** [21.593***] (566.951), cohort
2009: 1.162*** [20.558***] (186.080), cohort 2010: 2.573*** [23.002***] (277.716). Standard errors
clustered at the level of 175 local employment agency districts and individuals in parentheses. LATE,
local average treatment effect; LPR, local participation rate; OLS, ordinary least squares.
Significance level: ***1%; **5%; *10%. Confidence intervals in the figures indicate significance at the
5% level.
Results by Selected Subgroups

Results by Cohort
During the observation period from 2007 to 2010, the rules regarding the
implementation of the program were adjusted several times. Therefore, ex-
amining the effects by year cohort might offer valuable clues as to whether
changes in regulations or the macroeconomic situation affected the out-
comes of participants. I observe 2010 participants only for two years. To
have a common outcome period across all cohorts, I restrict the observation
window to two years.
I find larger effects on employment and earnings for participants in 2007
and 2008 than for the two later cohorts (Figure 3). In the two years after
treatment, 2007 (2008) compliers are employed for approximately 29 (40)
more days and earn 10% (13%) more than non-participants. The effects for
later cohorts are smaller, with approximately 20 more days employment
and 5% higher earnings in the first two years (partially statistically insignifi-
cant). The difference in these effects can be attributed to the compositional
differences of participating workers (see Table A.6 in the Supplemental
Online Appendix). Particularly in 2007 and 2008, subsidized workers had
the least favorable characteristics. They were more likely to be without any
vocational degree and were less attached to the firm, which reflects approxi-
mately twice as much unemployment compared to participants in 2009 and
2010. Moreover, they had substantially less employment and shorter

tenures. Thus, training might be particularly beneficiary for compliers with
low skills and high marginal returns to training. This finding is primarily
driven by men, as they constitute 80% of all participants.
This shift in the composition of the participating workforce can be
explained by changes in legislation: During the introductory phase of the
program, implementation was ambiguous to caseworkers; for example, it
was unclear which courses were fundable. Moreover, in 2008, the FEA ex-
panded the program to include recently re-employed workers who had left
unemployment directly before entering the program. As a result, from 2007
to 2009 funded training courses were shorter than they were later on, mak-
ing it easier for very low-skilled workers to obtain subsidized training.
In April 2009, the FEA introduced written rules and procedures for the im-
plementation of the subsidy program. Moreover, the Federal Court of
Auditors requested detailed documentation of the allocation of funds that
same year. These steps resulted in a trend of longer training courses that
granted a certificate at the end. This caused a steep decline in program
entries in 2010, as training became more costly for employers (indirect costs).
Compared to the introductory phase, this drew more employable workers to
the program in 2009 and 2010 (see Table A.6 in the supplementary material).
These changes in implementation are also linked to the economic and fi-
nancial crisis and thus the changing economic conditions that took place
between 2007 and 2010. In 2009, the FEA introduced further training dur-
ing short-time work as discussed in the section titled Role of Employers in
the Selection Process. Additionally, an economic stimulus package in
January 2009 prompted the FEA, among others, to expand subsidized train-
ing for employees to give firms the incentive to train surplus workers instead
of firing them (Möller 2010). A new law introduced a third target group for
2009 and 2010 to the existing target groups (workers in SME analyzed by
Dauth and Toomet [2016] and low-skilled workers analyzed here). This
new target group comprised workers who had not been funded by a public
project for the previous four years and workers whose vocational degree was
at least two years old (§ 421 t (4) Social Code III). As a consequence, this
third target group induced a general relaxation of the subsidy program
which—even though this third target group is not analyzed in this study—
potentially also affected the composition of the low-skilled target group such
that more able workers were trained during the crisis.
In sum, compositional differences over time explain the larger program
effects in the introductory phase and the smaller effects later on, assuming
decreasing returns to training and skills.
Results by Individual Characteristics

In the next step, I conduct subgroup analyses, pooling data for all cohorts
from 2007 to 2010. I include interactions with quarter and year dummies to
30 ILR REVIEW
Figure 4. LATE and OLS Estimates for Participation in the Subsidy Program by Gender

men: 1.499*** [20.742***] (244.921), women: 1.278*** [20.649***] (202.577). Standard errors clus-
tered at the level of 175 local employment agency districts and individuals in parentheses. LATE, local
average treatment effect; LPR, local participation rate; OLS, ordinary least squares.
5% level.
control for the timing of the (counterfactual) treatment start. I consider the
same outcome variables as in the previous section. I restrict the outcome
variables to the first three years after treatment, because for later outcomes,
I lose more observations and 2007 and 2008 participants would primarily
drive the results. Again, the first-stage values and F-test statistics confirm the
high quality of the instrument in most cases.
Looking at the effects on employment and earnings by gender (Figure
4), I find significantly higher returns to training on employment for women
working full time ( + 75 days) than for men working full time ( + 20 days) in
the first three years. This effect is even more pronounced in terms of earn-
ings, with complying women earning approximately 23% more than non-
treated women and men approximately 4% more. This outcome is likely at-
tributable to different distributions of women and men across sectors of the
economy. Table A.6 in the Supplemental Online Appendix material shows
that women are concentrated in the professions of health care, manage-
ment and organization, and humanities and arts, whereas men are concen-
trated in the fields of manufacturing, construction, and transportation and
logistics. In their respective sectors, women receive training courses that are,
on average, 60% longer and that probably impart deeper knowledge.
Moreover, unsubsidized women earn on average less than men in these sec-
tors, which translates into larger relative gains for women compared to men.
In contrast to the previous estimates, the 2SLS coefficients are larger than
the OLS coefficients for women. This suggests either that participating
women are a negative selection or that complying women, who participate
Figure 5. LATE and OLS Estimates for Participation in the Subsidy Program by Age

second-stage regressions. First-stage results: LPR [LPR2] (F-test) values for employment within 1 year: 25–
35 years: 1.467*** [20.766***] (265.521), . 35–45 years: 1.482*** [20.758**] (219.335), . 45–55
years: 1.466*** [20.705***] (256.381), . 55–65 years: 1.226*** [20.516***] (274.907). Standard errors
clustered at the level of 175 local employment agency districts and individuals in parentheses. LATE,
local average treatment effect; LPR, local participation rate; OLS, ordinary least squares.
Significance level: ***1%, **5%, *10%. Confidence intervals in the figures indicate significance at the
5% level.
due to higher residual LPRs, profit more than female always-takers. Thus,
drawing more women into the program might increase its efficiency.
In Figure 5 I separate the program effect by age group, and the youngest
participants, aged 25 to 35 years, seem to realize the highest gains in em-
ployment ( + 56 days) and earnings ( + 12% earnings) within three years.
The employment gains for workers between ages 35 and 55 accumulate to
approximately 30 days. Earnings increase by about 8%. The differences are
not statistically significant, however. The oldest age group of workers, 55 to
65 years, profits neither in terms of employment nor earnings. Thus, con-
trary to the findings of Dauth and Toomet (2016), who found that treat-
ment postpones retirement for workers 55 years and older in SME, low-
skilled workers above age 55 do not similarly profit from the program. This
difference might be attributable to more firm-financed training for non-
treated, low-skilled workers in larger firms—compared to SME—and thus a
better comparison group. Also, although Dauth and Toomet (2016) ana-
lyzed average treatment effects on the treated, compliers in that age group
simply might not profit as much as always-takers. Overall, the marginal
returns on employment and earnings seem to be particularly high at the be-
ginning of the employment career due to a lower initial level of knowledge,
lower opportunity costs, and better cognitive skills.
Figure 6 shows that the LATEs on employment do not differ significantly
between workers with German citizenship and workers without German citi-
zenship. Regarding earnings, non-Germans benefit more than Germans. In
32 ILR REVIEW
for Germans and Non-Germans

Germans: 1.431*** [20.725***] (318.625), Non-Germans: 1.874*** [20.916***] (164.005). Standard
errors clustered at the level of 175 local employment agency districts and individuals in parentheses.
LATE, local average treatment effect; LPR, local participation rate; OLS, ordinary least squares.
5% level.
the three years after treatment, complying non-German participants receive

earnings that are approximately 14% higher than those of other workers.
Germans profit by 8% in earnings. Given that the marginal returns are de-
creasing in the skill level, the lower skill and earnings levels of non-Germans
compared to Germans (see Table A.6 in the supplemental material) imply
higher marginal returns for non-Germans and explain the differing treat-
ment effects.13
Results by Tenure
In the literature on the evaluation of ALMPs for unemployed workers, the
timing of participation during the unemployment spell matters (Sianesi
2004; Fredriksson and Johansson 2008). Thus, researchers often apply dy-
namic approaches to account for the correlation between the probability of
being treated and unemployment duration.14 Adapting the timing in my
13
I conduct additional subgroup analyses; however, they do not provide further insights. There are no
differences in terms of the degree conferred at the end of a training course (see Figure A.1 in the sup-
plemental material). Firm size also does not seem to matter much for the effectiveness of the program
(see Figure A.2). If anything, complying workers of small firms with up to 25 workers seem to benefit
more than others. This effect holds only for earnings and only within the first two years after treatment.
Thus, in the short run, small firms profit more from training subsidies than do larger firms, which likely
rely on their own training funds.
14
The supplemental material contains a section in which I discuss the results of the dynamic
approach.
by Tenure and Worker Type

second-stage regressions. First-stage results: LPR [LPR2] (F-test) values for employment within 1 year: –89
to 0 days: 1.333*** [20.874***] (60.769), 1–183 days: 1.205*** [20.554***] (119.381), 184 to 730 days:
1.466*** [20.777***] (186.519), .730 days: 1.464*** [20.729***] (214.413). Standard errors clustered
at the level of 175 local employment agency districts and individuals in parentheses. LATE, local average
treatment effect; LPR, local participation rate; OLS, ordinary least squares.
Significance level: ***1%, **5%, *10%. Confidence intervals in the figures indicate significance at the
5% level.
setting, I examine whether treatment differs by tenure, that is, for new hires
versus long-serving workers. As outlined earlier, the program analyzed in
this study was introduced on January 1, 2007. Theoretically, one can distin-
guish between two types of workers: On the one hand, there are workers
who were already employed in January 2007 for whom the risk of treatment
starts with the introduction of the program. I call these workers ‘‘incum-
bents.’’ On the other hand, there are workers who began employment after
that date for whom the risk of treatment starts with employment in a given
firm. I call these workers ‘‘entrants.’’ Tenure is measured at the beginning
of the quarter of potential treatment. Thus, I assign negative tenure to
workers starting employment that quarter.
Figure 7 shows that by tendency employment and earnings effects are
larger for workers with short tenure.15 Among compliers who just entered
the firm, the employment and earnings effects ( + 109 days and + 26% in
three years) are largest. However, this group might also comprise workers
who just left unemployment and therefore had contact with the local em-
ployment agency. Consequently, the exclusion restriction might be violated
for this particular group and therefore the results should be interpreted
15
For a direct comparison, I only consider outcomes within three years. Entrants with a tenure .730
days start treatment the earliest in 2009. For these workers I observe the outcome only for a maximum of
three years.
34 ILR REVIEW
Table 11. Costs and Benefits of the Subsidy Program
Year: 2007 2008 2009 2010 Total
Average per capita cost per day over 2 years 3.08 5.22 7.28 10.34 6.67
Benefits
Average earnings during past 3 years 71.60 68.20 78.50 73.70 73.90
Effect on earnings after 2 years 0.097 0.133 0.056 0.046 0.075
Average additional earnings per day over 2 years 6.95 9.07 4.44 3.39 5.54
Sources: German Federal Employment Agency (FEA) controller data (costs). Integrated Employment
Biographies (IEB) V11.00–131009 (benefits). Author’s calculations.
Notes: As 60% of all inflows are double-counts by person, the approximate number of participants is
about 30% lower than the number of inflows. Boldface indicates the average daily costs and additional
earnings over all four years.
with caution.16 Apart from that, tenure does not drive program effectiveness
significantly. The point estimates remain comparable and are all statistically
insignificant due to imprecise estimations. Further distinguishing by
entrants and incumbents does not reveal any meaningful patterns.
Cost-Benefit Considerations
In this section, I provide a rough cost-benefit analysis at the participant level
for the first two years after entry into the program. Approximately 129,000
workers entered the program. FEA controller data reveal that total expenses
for the subsidy program amounted to approximately 626 million euros be-
tween 2007 and 2010. Over a two-year period, this amounts to a daily cost of
6.67 euros per person. On the benefit side, I assume that workers receive
the same average daily wage of approximately 74 euros as during the three
years before participation. Multiplying these daily wages by the estimated
LATE on earnings from Table 8 and Figure 3 yields an increase in daily per
capita earnings of approximately 5.54 euros. Thus, comparing daily per
capita costs and daily per capita benefits over a two-year period, the pro-
gram seems to cost more than the benefits that are gained on average
(Table 11).
To break even, the program should pay for the daily average cost of 6.67
euros. Given that the additional daily earnings are lower than that in most
years, except for 2007 and 2008, it is unlikely that additional tax revenues
will approach those costs. Thus, in budgetary terms, the program might not
be a good investment for the government, at least over a two-year period.
Further gains in employment or earnings beyond a two-year horizon might
improve the benefits from the program. However, I ignore any general
equilibrium effects that might arise. Moreover, to conduct a correct analysis
I lack further necessary information, such as administrative costs for the
16
Dropping this group of workers from the sample does not alter the overall estimates much. They are
therefore not an important driver of the LPR. Results available on request.
caseworkers, changes in firm productivity, reduced benefit transfers, and

higher social security contributions.
Conclusion
In this article, I have analyzed the impact of further training subsidies tar-
geted at low-skilled employed workers between 2007 and 2010. Thereby, I
contribute to the scarce literature on the effects of subsidized further train-
ing for low-skilled employed workers rather than for unemployed workers.
For identification, I rely on an IV approach, exploiting residual regional var-
iation in the local participation rates in subsidized training between local
employment agencies, which I call policy styles. These policy styles are exog-
enous to the labor market outcomes of employed workers, hence enabling
me to predict program participation and to obtain local average treatment
effects.
The evidence suggests that the subsidy improved the labor market out-
comes (employment, unemployment, and earnings) of subsidy recipients.
For compliers, I find positive effects of 93 more days of employment, an in-
crease in earnings by about 13%, and a reduction of unemployment of 45
days over a period of five years. Given that Haelermans and Borghans
(2012) reported an average return to privately funded training of 3.5%,
these estimates are nearly four times as large as those reported in the litera-
ture. With one additional quarter of employment, the effect on cumulative
employment is also substantial. Half of this effect is attributable to a shift
from unemployment to employment. The other half is likely attributable to
a shift from labor market withdrawal to employment.
Substantial heterogeneity occurs across groups of compliers, however. In
particular, workers starting program participation in 2007 and 2008 profit
more in terms of employment and earnings than do later cohorts. This find-
ing is related to a compositional change in the participants, which was
triggered by an economic crisis and adjustments in FEA regulations.
Consequently, low-skilled workers who entered the program later had char-
acteristics that are more favorable and therefore gained relatively little from
the subsidy program. Further beneficiaries of the program include women,
younger workers, and non-Germans. I complement the analysis with several
robustness checks, which support the validity of the empirical approach and
the robustness of the previous findings.
From a political perspective, the results of this study suggest that targeting
females, younger workers, and non-Germans might increase the subsidy
program’s efficiency. In fact, recent adjustments by the FEA emphasize
these groups (e.g., training in the female-dominated occupation of elderly
care and focusing on younger workers since April 2012). Recently, the pro-
gram has increasingly been used to qualify refugees who found a job. In this
sense, my study provides ex post justification for these adjustments.
36 ILR REVIEW
Note that employer involvement determines training participation. Even

though I conduct various robustness tests, I cannot guarantee that I exclude
all potential firm confounders that simultaneously affect both the worker’s
program participation and employment prospects. Moreover, I cannot rule
out that firms substitute subsidized training for unsubsidized training.
Nevertheless, I believe that a substantial part of the effect I measure is in
fact training that would not have occurred otherwise. Workers with low
schooling or without a vocational degree have a below-average training par-
ticipation rate, that is, about half the rate of workers with high school or col-
lege degrees (BIBB 2016). The low incidence of existing training for low-
skilled workers makes it less likely that the program subsidizes training for
workers who would have been trained anyway.
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REGIONAL DISCONTINUITIES AND THE

EFFECTIVENESS OF FURTHER TRAINING

I n recent decades, low-skilled workers in particular have been affected by

ILR Review, XX(X), Month 201X, pp. 1–38

in 2000. Consequently, European policymakers directed great attention to

German Training Subsidy Program

Table 1. Percentage of Workers Employed on June 30 Who Seek Counsel or

Year Counsel Job-seeking N

2007 0.075 2.27 461,217

Source: Integrated Employment Biographies (IEB) V13.00. Author’s calculations.

further training for unemployed workers. However, only approximately

Table 2. Inflows to the Subsidy Program and Per Capita Costs

Cost reimbursement Wage subsidy

(§81 (2) SGB III) (§81 (5) SGB III)

Year Inflows Costs in EUR Inflows Cost in EUR

2007 10,458 1,425.88 14,527 1,681.51

Source: Statistics of the German Federal Employment Agency (FEA).

Table 3. Duration of Subsidized Training in Days

Mean First quartile Median Third quartile

Source: Integrated Employment Biographies (IEB) V11.00–131009. Author’s calculations.

Nevertheless, we can expect substantial effects on employment and

Role of Employers in the Selection Process

often due to capital constraints (Leuven and Oosterbeek 1999; Bassanini

differences in paradigms, problem-solving mechanisms, and cooperative be-

Local Average Treatment Effect (LATE) Framework

by i, at the firm level by f, and at the agency district level by a; q indicates

ð3Þ LPRatq = b0i + b1i Xitq + b2 Fft + b3 Aat + sitq

These factors are also likely to impact individuals’ probabilities of partici-

Source: Integrated Employment Biographies (IEB) V11.00–131009. Author’s calculations.

The implementation of the instrumental variable (IV) is accomplished by

ð6Þ Titq = g0i + g1i Z 1itq + g2i Z 2itq + vitq

Treatment probability in shares

b) Dropping the upper 5% outliers

Treatment probability in shares

0 .05 .1 .15 .2 0 .05 .1 .15 .2

Source: Integrated Employment Biographies (IEB) V11.00–131009. Author’s calculations.

Data, Variables, and Sample Selection

2007 11,368 60.03 90.06

Source: Integrated Employment Biographies (IEB) V11.00–131009. Author’s calculations.

Table 5. Definition of Outcome Variables

Employment Unemployment Log earnings

Sum of days in Sum of days in non-employment Logarithm of the average

occupational groups, subsidized workers are over-represented in

Table 6. Selected Worker, Establishment, and Regional Characteristics

Treated Comparisons Difference p value

Female 0.21 0.35 20.13 0.00

Source: Integrated Employment Biographies (IEB) V11.00–131009. Author’s calculations.

Table 7. LATE Estimates for Participation in the Subsidy Program on Cumulative

(1) (2) (3) (4) (5)

Treated 52.035*** 30.542*** 24.082*** 23.583*** 33.802***

First-stage results, dependent

Source: Integrated Employment Biographies (IEB) V11.00–131009. Author’s calculations.

In column (2), I include a large set of firm characteristics, because fac-

Additional Labor Market Outcomes

(1) (2) (3)

2 SLS OLS 2 SLS OLS 2 SLS OLS

Over 1 year 14.346*** 19.112*** 25.854*** –8.262*** 0.072*** 0.084***

Source: Integrated Employment Biographies (IEB) V11.00–131009. Author’s calculations.

Outcomes are measured starting at the end of the quarter of potential

Treated 52.035* 30.542* 24.082* 23.583* 33.802***

Over 1 year 14.346* 19.112* 25.854* –8.262* 0.072* 0.084*