Labor Market Reforms in Open Economies: Current Account Dynamics and Consumer Heterogeneity

Brigitte Hochmuth, Moyen, Stéphane, Schröter, Felix and Stähler, Nikolai

No 20092, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper links labor market reforms to an increase in the reforming country’s net foreign asset position via a precautionary savings channel. We assess how a major cut in unemployment benefits affected Germany’s current account. Using a heterogeneous agent model of a small open economy with labor market frictions, we show that accounting for precautionary savings is both qualitatively and quantitatively important. In the first five years, the reform contributed 12 percent to the dynamics of the German current account. Welfare gains and losses are distributed unequally among agents. Compared to a closed economy, the reform is more detrimental.

JEL-codes: E21 E24 F16 F41 (search for similar items in EconPapers)
Date: 2025-03
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