Welfare States and the Scar Effects of Unemployment: A Comparative Analysis of the United States and West Germany

The article examines whether, through supporting workers’ search for adequate reemployment, the decommodification achieved by welfare state transfers reduces the longer‐run scar effects of unemployment. Drawing on employment history data from the Survey of Income and Program Participation and the German Socio‐Economic Panel, the analysis establishes positive effects of unemployment benefits on workers’ post‐unemployment jobs: workers’ risks of incurring severe earnings losses, of experiencing occupational mobility, and of entering unstable job arrangements are considerably reduced in both the United States and West Germany. As workers face constrained choices in labor markets, however, this institutional protection of workers’ economic status comes at the economic cost of prolonged unemployment. Simulation analyses suggest that higher benefit coverage alone might account for up to 20% of the smaller cumulative disadvantages associated with unemployment for German workers.