Quantifying the Germany shock: Structural labor-market reforms and spillovers in a currency union

Harald Fadinger, Philipp Herkenhoff and Jan Schymik

Journal of International Economics, 2024, vol. 150, issue C

Abstract: We examine the effects of unilateral structural reforms within a currency union. Focusing on the surge of German competitiveness following the introduction of the Euro, we first provide reduced-form causal evidence supporting the notion that German structural labor-market reforms in the early 2000s led to a crowding-out of manufacturing employment in other Eurozone economies. To assess the impact of this German competitiveness shock, we build a quantitative multi-sector trade model that features downward nominal wage rigidities, endogenous labor supply, unemployment-insurance benefits and international savings. The fixed nominal exchange rate can create binding nominal rigidities in response to a foreign real supply shock – like the one prompted by the German reforms – resulting in significant contraction of manufacturing sectors and increased involuntary unemployment across other Eurozone countries. We consider a number of counterfactual scenarios, such as the impact of German labor-market reforms in the absence of a fixed exchange-rate regime, the role of coordinated reforms within the Eurozone and a higher average inflation rate.

Keywords: Euro; Monetary union; Nominal rigidities; Labor markets; Structural reforms; Import competition; Spillovers; Quantitative trade model (search for similar items in EconPapers)
JEL-codes: F16 F41 F45 (search for similar items in EconPapers)
Date: 2024
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Chapter: Quantifying the Germany Shock: Structural Labor-Market Reforms and Spillovers in a Currency Union (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:150:y:2024:i:c:s0022199624000291

DOI: 10.1016/j.jinteco.2024.103905

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