Macroeconomic Evaluation of Labor Market Reform in Germany

Tom Krebs and Martin Scheffel ()

IMF Economic Review, 2013, vol. 61, issue 4, 664-701

Abstract: In 2003–05 the German government implemented a number of far-reaching labor market reforms, the so-called Hartz reforms. At the heart of the reform package was the Hartz IV law, which resulted in a significant cut in the unemployment benefits for the long-term unemployed. The paper develops a macroeconomic model with search and incomplete markets, calibrates the model economy to German data and institutions, and uses the calibrated model economy to simulate the effects of the Hartz reforms, and in particular Hartz IV, on the German labor market. The paper finds that the Hartz IV reform reduced the noncyclical unemployment rate in Germany by 1.4 percentage points. Employed workers benefited from the Hartz IV reform in welfare terms, but unemployed workers lost. It further finds that the Hartz I–III reforms reduced the noncyclical unemployment rate in Germany by 1.5 percentage points. Finally, the authors’ analysis suggests that the Hartz reforms contributed to the good performance of the German labor market during the Great Recession.

Date: 2013
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Related works:
Working Paper: Macroeconomic Evaluation of Labor Market Reform in Germany (2012)
Working Paper: A macroeconomic model for the evaluation of labor market reforms (2010)
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