A macroeconomic model for the evaluation of labor market reforms

Tom Krebs and Martin Scheffel (dr.martin.scheffel@gmail.com)

No 10-050, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: We develop a tractable macroeconomic model with employment risk and labor market search in order evaluate the effects of labor market reform on unemployment, growth, and welfare. The model has a large number of risk-averse households who can invest in risk-free physical capital and risky human capital. Unemployed households receive unemployment benefits and decide how much search effort to exert. We present a theoretical characterization result that facilitates the computation of equilibria substantially. We calibrate the model to German data and use the calibrated model economy to simulate the macroeconomic effects of the German labor market reforms of 2005 and 2006 (Hartz Reforms). We find that the 2005-reform had large employment effects: the equilibrium unemployment rate has been reduced by approximately 1.1 percentage points from 7.5 to 6.4 percent. Moreover, the drop in unemployment has led to substantial output gains. Finally, employed and short-term unemployed households experienced significant welfare gains, whereas the long-term unemployed have lost in welfare terms. The effects of the 2006-reform are qualitatively similar, but quantitatively much smaller. We also show that the social welfare maximizing replacement rate is lower than the current (post-reform) replacement rate in Germany. However, implementing the optimal unemployment benefit system generates only small welfare gains.

Keywords: dynamic general equilibrium; heterogenous agents; human capital; labor market search; unemployment insurance; German labor market reform (search for similar items in EconPapers)
JEL-codes: E24 E60 J64 J65 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-eec, nep-ias, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Macroeconomic Evaluation of Labor Market Reform in Germany (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:10050

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