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Macroeconomic Evaluation of Labor Market Reform in Germany

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Listed:
  • 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.

Suggested Citation

  • Tom Krebs & Martin Scheffel, 2013. "Macroeconomic Evaluation of Labor Market Reform in Germany," IMF Working Papers 13/42, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/42
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic models; Germany; Incomplete markets; Labor market reforms; Unemployment; Welfare; Labor Market Reform; unemployed; unemployment rate; labor market; employment;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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