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Macroeconomic Evaluation of Labor Market Reform in Germany

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  • Krebs, Tom
  • Scheffel, Martin

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 University of Mannheim, Department of Economics in its series Working Papers with number 12-23.

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Date of creation: 2012
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Handle: RePEc:mnh:wpaper:32929

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Keywords: Labor Market Reform ; Unemployment ; Welfare;

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References

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  1. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
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  3. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  4. Jochen Kluve & Lena Jacobi, 2006. "Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany," RWI Discussion Papers 0041, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
  5. Addison, John T. & Centeno, Mario & Portugal, Pedro, 2008. "Unemployment Benefits and Reservation Wages: Key Elasticities from a Stripped-Down Job Search Approach," IZA Discussion Papers 3357, Institute for the Study of Labor (IZA).
  6. Andrey Launov & Klaus Wälde, 2010. "Estimating Incentive and Welfare Effects of Non-Stationary Unemployment Benefits," Working Papers 1007, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 21 May 2010.
  7. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  8. Michael C. Burda & Jennifer Hunt, 2011. "What Explains the German Labor Market Miracle in the Great Recession?," SFB 649 Discussion Papers SFB649DP2011-031, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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  14. Fahr, René & Sunde, Uwe, 2009. "Did the Hartz Reforms Speed-Up the Matching Process? A Macro-Evaluation Using Empirical Matching Functions," Munich Reprints in Economics 20482, University of Munich, Department of Economics.
  15. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
  16. Streufert, Peter A, 1990. "Stationary Recursive Utility and Dynamic Programming under the Assumption of Biconvergence," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 79-97, January.
  17. Romain Bouis & Orsetta Causa & Lilas Demmou & Romain Duval & Aleksandra Zdzienicka, 2012. "The Short-Term Effects of Structural Reforms: An Empirical Analysis," OECD Economics Department Working Papers 949, OECD Publishing.
  18. Philip, Jung & Moritz, Kuhn, 2011. "The Era of the U.S.-Europe Labor Market Divide: What can we learn?," MPRA Paper 32322, University Library of Munich, Germany.
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Cited by:
  1. Felbermayr, Gabriel & Impullitti, Giammario & Prat, Julien, 2014. "Firm Dynamics and Residual Inequality in Open Economies," CEPR Discussion Papers 9855, C.E.P.R. Discussion Papers.
  2. Christopher A. Pissarides, 2013. "Unemployment in the Great Recession," CEP Discussion Papers dp1210, Centre for Economic Performance, LSE.
  3. Berthold, Norbert & Coban, Mustafa, 2014. "Kombilöhne gegen Erwerbsarmut: Warum die USA erfolgreicher sind als Deutschland," Wirtschaftswissenschaftliche Beiträge 125, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  4. 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.
  5. Launov, Andrey & Wälde, Klaus, 2013. "Thumbscrews for Agencies or for Individuals? How to Reduce Unemployment," IZA Discussion Papers 7659, Institute for the Study of Labor (IZA).
  6. 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.
  7. 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.
  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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