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Macroeconomic Evaluation of Labor Market Reform in Germany

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  • Tom Krebs
  • Martin Scheffel

Abstract

In 2005 the German government implemented the so-called Hartz IV reform, which amounted to a complete overhaul of the German unemployment insurance system and resulted in a significant reduction in unemployment benefits for the long-term unemployed. In this paper, we use an incomplete-market model with search unemployment to evaluate the macro-economic and welfare effects of the Hartz IV reform. We calibrate the model economy to German data before the reform and then use the calibrated model economy to simulate the effects of Hartz IV. In our baseline calibration, we find that the reform has reduced the long-run (noncyclical) unemployment rate in Germany by 1.4 percentage points. We also find that the welfare of employed households increases, but the welfare of unemployed households decreases even with moderate degree of risk aversion.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/42.

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Length: 42
Date of creation: 13 Feb 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/42

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Keywords: Labor market reforms; Germany; Unemployment; Welfare; Economic models; unemployed; unemployment rate; unemployment benefits; unemployment insurance; long-term unemployment; unemployment insurance system; unemployment rates; job search; unemployment spell; unemployment benefit system; employment agency; employment increases; effect of unemployment; unemployment duration; average unemployment rate; recession; employment agencies; unemployed workers; labor supply; public employment; duration of unemployment; employment opportunities; new employment opportunities; search unemployment; unemployment assistance; unemployment research; employment status; equilibrium unemployment; private employment; labor productivity; re-employment probability; unemployment risk; equilibrium unemployment rates; job loss; structural unemployment; eligibility for unemployment benefits; private employment agencies; period of unemployment; unemployment reduction; unemployed individuals; labor demand; cyclical unemployment;

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  1. Jennifer Hunt, 1992. "The Effect of Unemployment Compensation on Unemployment Duration in Germany," Discussion Papers of DIW Berlin 50, DIW Berlin, German Institute for Economic Research.
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Cited by:
  1. Amélie Barbier-Gauchard & Francesco De Palma & Giuseppe Diana, 2013. "Why could Northern labor market flexibility save the eurozone ?," Working Papers of BETA 2013-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Kurt Kratena & Mark Sommer, 2014. "Labour Market Policy and Environmental Fiscal Devaluation: A Cure for Spain in the Aftermath of the Great Recession?," WIFO Working Papers 476, WIFO.
  3. Norbert Berthold & Mustafa Coban, 2014. "Kombilöhne gegen Erwerbsarmut: Warum die USA erfolgreicher sind als Deutschland," Wirtschaftsdienst, Springer, vol. 94(2), pages 118-124, February.
  4. Christopher A. Pissarides, 2013. "Unemployment in the Great Recession," Economica, London School of Economics and Political Science, vol. 80(319), pages 385-403, 07.
  5. Gabriel J. Felbermayr & Giammario Impullitti & Julien Prat, 2014. "Firm Dynamics and Residual Inequality in Open Economies," CESifo Working Paper Series 4666, CESifo Group Munich.
  6. Andrey Launov & Klaus Wälde, 2013. "Thumbscrews for Agencies or for Individuals? How to Reduce Unemployment," Working Papers 1307, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 01 Sep 2013.
  7. Busl, Claudia & Seymen, Atılım, 2013. "The German labour market reforms in a European context: A DSGE analysis," ZEW Discussion Papers 13-097, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Claudia Busl & Atilim Seymen, 2013. "(Spillover) Effects of Labour Market Reforms in Germany and France," WWWforEurope Working Papers series 8, WWWforEurope.

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