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Macroeconomic Evaluation of Labor Market Reform in Germany

  • Tom Krebs
  • Martin Scheffel

In 2003–05 the German government implemented a number of far-reaching labor market reforms, the so-called Hartz reforms. At the heart of the reform package was the Hartz IV law, which resulted in a significant cut in the unemployment benefits for the long-term unemployed. The paper develops a macroeconomic model with search and incomplete markets, calibrates the model economy to German data and institutions, and uses the calibrated model economy to simulate the effects of the Hartz reforms, and in particular Hartz IV, on the German labor market. The paper finds that the Hartz IV reform reduced the noncyclical unemployment rate in Germany by 1.4 percentage points. Employed workers benefited from the Hartz IV reform in welfare terms, but unemployed workers lost. It further finds that the Hartz I–III reforms reduced the noncyclical unemployment rate in Germany by 1.5 percentage points. Finally, the authors’ analysis suggests that the Hartz reforms contributed to the good performance of the German labor market during the Great Recession.

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Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 61 (2013)
Issue (Month): 4 (December)
Pages: 664-701

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Handle: RePEc:pal:imfecr:v:61:y:2013:i:4:p:664-701
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  9. René Fahr & Uwe Sunde, 2009. "Did the Hartz Reforms Speed-Up the Matching Process? A Macro-Evaluation Using Empirical Matching Functions," German Economic Review, Verein für Socialpolitik, vol. 10, pages 284-316, 08.
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  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. Tom Krebs, 2003. "Human Capital Risk And Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 709-744, May.
  19. 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.
  20. Rasmus Lentz, 2003. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," CAM Working Papers 2004-10, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  21. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
  22. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
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  25. Jacobi, Lena & Kluve, Jochen, 2006. "Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany," IZA Discussion Papers 2100, Institute for the Study of Labor (IZA).
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