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The Hartz Reforms, the German Miracle, and the Reallocation Puzzle

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  • Bauer, Anja
  • King, Ian Paul

Abstract

We examine the proposition that the German Hartz reforms offset the GFC's effect on unemployment (leading to the "German miracle") and the GFC offset the Hartz reform's effects on reallocation, in Germany (leading to the "reallocation puzzle") over the period 2005-2010. To do so, we use a labor reallocation model based on Lucas and Prescott (1974), but with the additional features of unemployment benefits and rest unemployment. The model generates two simple conditions that must hold for two events to offset each other in this way. We estimate the key parameters of the model to assess the extent to whether these conditions were satisfied in Germany over that period. We find that the observed drop in productivity due to the GFC (6.3%) was very close to the drop required to explain the reallocation puzzle (6.8%). Conditional on this offset taking place, the observed percentage drop in unemployment benefits (16.7%) was approximately twice that required (6.3%) for the German miracle, and consistent with the significant drop in unemployment over the period.

Suggested Citation

  • Bauer, Anja & King, Ian Paul, 2016. "The Hartz Reforms, the German Miracle, and the Reallocation Puzzle," Annual Conference 2016 (Augsburg): Demographic Change 145702, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145702
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    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
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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