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How welfare cuts in Germany worsened health outcomes of unemployed persons

U of T-affiliated study results could have implications for social welfare in Ontario
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The 2005 Hartz IV reform in Germany was responsible for damaging health outcomes among unemployed people, according to researchers. COURTESY OF BREMER MONTAGSDEMO/WIKIMEDIA COMMONS
The 2005 Hartz IV reform in Germany was responsible for damaging health outcomes among unemployed people, according to researchers. COURTESY OF BREMER MONTAGSDEMO/WIKIMEDIA COMMONS

One of the most drastic changes to Germany’s welfare system, the 2005 Hartz IV reform, worsened health outcomes among unemployed people, according to a U of T-affiliated research study.

This specific reform in Germany’s welfare policies affected unemployed Germans who received needs-based unemployment assistance. Prior to 2005, this financial assistance amounted to 57 per cent of the recipient’s previous earnings. After the Hartz IV reform, however, the German government replaced these percentage-based payments with a flat-rate of 424 euros every month, cutting the average recipient’s benefits by 25 per cent.

The study’s methods and results

The co-authors examined the direct effect of this welfare reduction on the self-rated health of those who received these benefits.

To carry out this study, they compared a group of unemployed welfare recipients to a control group of unemployed persons who were similar to the experimental group, but did not rely on the specific benefits that were reduced by the Hartz IV reform. This statistical technique is known as a difference-in-differences approach — a comparison of two groups that are nearly identical in all but the trait of interest, in order to minimize the effects of confounding variables.

By comparing the self-rated health of the two groups before and after the reform, the researchers found that both groups experienced worsening self-rated health after the reform. However, the group of welfare recipients reported an additional 3.6 percentage point increase of poor self-rated health.

“Using our [difference]-in-differences design, we [can] attribute that 3.6 [percentage point] increase in poor self-rated health to the effect of welfare reform,” said Dr. Faraz Shahidi, the lead author of the study affiliated with U of T’s Dalla Lana School of Public Health, in an interview with The Varsity.

Applicability of findings to Canada

While this study focuses on Germany, the findings are generalizable to high-income countries that provide financial assistance to low-income populations, such as Canada. Like Germany, Canada has also reduced its welfare benefits over time. In 1995, for example, Ontario cut social assistance rates by 22 per cent, causing the province’s welfare recipients to lose one fifth of their main income source.

“Since the 1990s, no [Canadian] jurisdiction has made a serious effort to increase welfare rates. On the contrary, benefits have either stagnated or borne the cost of additional austerity measures like the one we examined in Germany,” said Shahidi.

“As a result, the millions of people who [rely] on social assistance have seen a substantial decline in their absolute and relative economic standing over the last few decades.”

It is clear, through this study, as well as numerous studies conducted in other countries, that there is a negative correlation between regressive welfare reforms and the health of welfare recipients. Shahidi pointed out that welfare cuts have previously been associated with “elevated rates of mortality and mental health conditions.”

Welfare reductions can also force former welfare recipients to take unreliable, low-wage jobs to replace the benefits they have lost, according to the co-authors.

Potential cuts in future Canadian welfare

Some Ontario politicians continue to push for reduced spending in social assistance programs, such as Ontario Works, Ontario Disability Support Program, and the Transitional Child Benefit. In November 2018, the provincial government announced its plan to dramatically reduce its spending on these programs.

However, in late 2019, the government cancelled these cuts and retained the current system, in part due to advocacy efforts like the Campaign Against the Cuts to Social Assistance. The Ontario government continues to propose a limitation to those who will qualify for financial support under the Ontario Disability Support Program.

Clear science, complicated politics

The continuation of government policies that reduce welfare benefits highlights an important contradiction between scientific evidence and political actions. “Put simply, welfare reform is not [an] evidence-based policy… Power, ideology, and interests are often more decisive factors driving the agenda,” Shahidi said.

While Shahidi suggested that it would be beneficial for future researchers to investigate the underlying causes of the relationship between welfare reform and negative health outcomes, he believes that there is a strong enough base of scientific evidence to support the expansion of social welfare programs that are known to protect recipients’ health.

What complicates the implementation of these regressive reforms is the question of “who stands to gain and who stands to lose?” The available evidence points to “a straightforward answer to the second half of that equation,” Shahidi noted.

“In addition to posing a measurable threat to the health of economically vulnerable households, benefit cuts and related austerity measures impose substantial economic costs on… impoverished families, their communities, and even society as a whole.”