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Labor Market Reform and the Cost of Business Cycles

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  • Tom Krebs

    (University of Mannheim)

Abstract

This paper studies the effect of labor market reform on the welfare cost of business cycles. Motivated by the German labor market reforms of 2003-2005, the so-called Hartz reforms, the paper focuses on two labor market institutions: the unemployment insurance system determining search incentives and the system of job placement services affecting matching efficiency. The paper develops a tractable search model with idiosyncratic labor market risk and risk-averse workers, and derives a closed-form solution for the welfare cost of business cycles as a function of the various parameters of interest. An improvement in job placement services leads to a reduction in the welfare cost of business cycles, but a change in unemployment benefit generosity has in general an ambiguous effect. A quantitative analysis based on a calibrated version of the model suggests that the German labor market reforms of 2003-2005 reduced the non-cyclical unemployment rate by 3 percentage points and reduced the welfare cost of business cycles by 30 percent.

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  • Tom Krebs, 2014. "Labor Market Reform and the Cost of Business Cycles," 2014 Meeting Papers 1017, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:1017
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Labor Market Reform and the Cost of Business Cycles
      by Christian Zimmermann in NEP-DGE blog on 2015-02-28 06:48:26

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    Cited by:

    1. Michael Stops, 2016. "Revisiting German labour market reform effects—a panel data analysis for occupational labour markets," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-43, December.
    2. Gadatsch, Niklas & Stähler, Nikolai & Weigert, Benjamin, 2016. "German labor market and fiscal reforms 1999–2008: Can they be blamed for intra-euro area imbalances?," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 307-324.
    3. Eleni Iliopulos & François Langot & Thepthida Sopraseuth, 2019. "Welfare Cost of Fluctuations When Labor Market Search Interacts with Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(8), pages 2207-2237, December.
    4. Launov, Andrey & Wälde, Klaus, 2016. "The employment effect of reforming a public employment agency," European Economic Review, Elsevier, vol. 84(C), pages 140-164.

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    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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