Governmental policies to reduce unemployment during recessions: Insights from an ABM

The persistently low and (partly) negative output growth in Germany in 2019 evoked memories of the recent global economic crisis and, by this, sparked debates about measures to counter the growing number of unemployed, for example changing the generosity of unemployment benefits (UB) and short-time work. This paper aims to contribute to the theoretical literature of policy responses to recessions by analyzing three prominent instruments: a) a permanent (simultaneous) reduction of unemployment benefits and increasing search efforts, b) a fiscal stimulus and c) short-time work. In contrast to other studies that use, e.g., search (and matching) models, I build an agent-based macroeconomic model (ABM). Using an ABM allows me to analyze the macro- and microeconomic effects of such policies as well as their interplay. Further, I can analyze the effects from the heterogeneity of agents. I find four main results: 1) a) has nearly no effect on unemployment in the short run and its effects are limited in the long run. This is contrary to the canonical search and matching models, even though the policy reveals the same 'desired' effects, e.g. shorter unemployment spells. Nevertheless, it confirms recent research on the topic. 2) However, contrary policies, i.e. increasing the unemployment benefits, do not improve the situation either. Unemployment rather increases in the long run. 3) In comparison to a), policies b) and c) can dampen unemployment in the short run. 4) In contrast to representative agent (equilibrium) models, I can show that short-time work supports the economic recovery through demand stabilization and distributive effects among heterogeneous firms. Especially, the distributive effects of short-time work have not been shown in other papers so far.