Incomplete insurance and open-economy spillovers of labor market reforms

Brigitte Hochmuth, Christian Merkl and Heiko Stüber

No 03/2024, FAU Discussion Papers in Economics from Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics

Abstract: This paper studies how an unemployment-benefit reform in one member state of a mon- etary union affects savings, net foreign asset positions, and fiscal space across member states when households face incomplete insurance. Lower benefits reduce unemploy- ment and increase fiscal space in the reforming country. Employed workers increase their precautionary savings to compensate for reduced public insurance. A portion of these savings is invested abroad, pushing the non-reforming country into a negative net foreign asset position and lowering its long-run consumption. Despite raising fis- cal space and long-run average consumption in the reforming country, the reform may decrease ex-ante welfare because it reduces insurance and depresses consumption during the transition as households self-insure through higher savings. We discipline our pro- posed model with firm-level evidence on Germany's post-reform tradable-sector expansion following the Hartz IV reform of unemployment benefits. In our simulation, this reform accounts for a substantial share of the observed post-reform open-economy adjustment, whereas the earlier wage moderation cannot explain most of the observed patterns.

Keywords: Unemployment insurance reform; spillover effects; precautionary savings (search for similar items in EconPapers)
JEL-codes: E21 E24 F16 F41 (search for similar items in EconPapers)
Date: 2026, Revised 2026
New Economics Papers: this item is included in nep-dge, nep-eec and nep-opm
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Related works:
Working Paper: Incomplete Insurance and Open-Economy Spillovers of Labor Market Reforms (2026)
Working Paper: Incomplete Insurance and Open-Economy Spillovers of Labor Market Reforms (2026)
Working Paper: Incomplete Insurance and Open-Economy Spillovers of Labor Market Reforms (2026)
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