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Macroeconomic Evaluation of Labor Market Reform in Germany

  • Tom Krebs
  • Martin Scheffel

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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/42.

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Length: 42
Date of creation: 13 Feb 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/42
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  12. Dirk Krüger, 2009. "Inequality Trends for Germany in the Last Two Decades: A Tale of Two Countries," MEA discussion paper series 09184, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
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  17. 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).
  18. 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.
  19. Acemoglu, Daron & Shimer, Robert, 2000. "Productivity gains from unemployment insurance," European Economic Review, Elsevier, vol. 44(7), pages 1195-1224, June.
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  21. 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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  23. 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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