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Hartz IV and the Decline of German Unemployment: A Macroeconomic Evaluation

Author

Listed:
  • Hochmuth, Brigitte

    (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and Institute for Advanced Studies Vienna, Austria (IHS))

  • Kohlbrecher, Britta

    (Friedrich-Alexander University of Erlangen-Nürnberg (FAU))

  • Merkl, Christian

    (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and IZA)

  • Gartner, Hermann

    (Friedrich-Alexander University of Erlangen-Nürnberg (FAU) and Institute for Employment Research (IAB))

Abstract

This paper proposes a new approach to evaluate the macroeconomic effects of the “Hartz IV” reform, which reduced the generosity of long-term unemployment benefits. We propose a model with different unemployment durations, where the reform initiates both a partial effect and an equilibrium effect. We estimate the relative importance of these two effects and the size of the partial effect based on the IAB Job Vacancy Survey. Our approach does not hinge on an external source for the decline in the replacement rate for long-term unemployed. We find that Hartz IV was a major driver for the decline of Germany’s steady state unemployment and that partial and equilibrium effect were nearly of equal importance. In addition, we provide direct empirical evidence on labor selection, one potential dimension of recruiting intensity.

Suggested Citation

  • Hochmuth, Brigitte & Kohlbrecher, Britta & Merkl, Christian & Gartner, Hermann, 2021. "Hartz IV and the Decline of German Unemployment: A Macroeconomic Evaluation," IHS Working Paper Series 31, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihswps:31
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    More about this item

    Keywords

    Unemployment benefits reform; search and matching; Hartz reforms;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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