Macroeconomic Implications of the Hartz IV Labor Market Reform
Final Report Abstract
We show that the Hartz IV labor market reform led to a decline of aggregate unemployment in Germany of around 2 percentage points. Half of this effects is driven by partial effects, i.e. firms being less selective when recruiting new workers. The other half is driven by equilibrium effects, i.e. firms posting more open jobs and thereby increasing workers’ probability to find a job. These results are obtained based on a combination of macroeconomic counterfactual exercise and microeconometric estimations. We also show that the reorganization of the Federal Employment Agency (Hartz III) contributed to the decline of aggregate unemployment. However, it did so in a different way than expected. The Federal Employment Agency did not improve its capability to intermediate jobs itself. Instead, by improving its activation policies, it encouraged workers to use the private matching market more actively. This result is obtained based on the combination of data from the German Socio-Economic Panel (SOEP) and a structural model matching exercise. While the German labor market reforms were a success in terms of reducing aggregate unemployment, they may have contributed to international imbalances. We analyze this issue from two perspectives. We show in a small-open economy model with incomplete insurance that the Hartz labor market reforms stimulated precautionary saving. We obtain support for this perspective by SOEP data. In the model, the labor market reform leads to more savings, an increase of the current account and more net foreign assets. To analyze the spillovers on other economies, we analyze this issue in a two-country open economy model with incomplete insurance. The Hartz reforms trigger a decline of the steady state interest rate in the two-country model. Thereby, short-run consumption in the non-reforming country increases. The non-reforming country gets permanently indebted and faces a long-run consumption drop. Our paper identifies sizable long-run negative consumption spillovers from the reforming to the non-reforming country. Ex ante, we did not expect that the Hartz III reforms led to a decline of the matching share of the Federal Employment Agency. This was discovered based on SOEP data. We knew at the beginning of the project that it matters how to close the open-economy in the context of a permanent policy exercise. However, it came as a surprise how important the role of complete insurance is, which is conventionally used in many papers. The last two papers deviate from this assumption and deliver results that are different from the existing literature. Merkl, Christian: Perspektiven zum Bürgergeld, Wirtschaftsdienst 2022, 102 (2), 86-89. FAU-Forscher Merkl: So wird das neue Bürgergeld ein Erfolg. Nürnberger Nachrichten, 15.02.2022. Merkl, Christian; Timo Sauerbier: The Reorganization of the Federal Employment Agency Mattered for the German Labor Market Upswing, but in an Unexpected Way, VoxEU, April 2023.
Publications
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Hartz IV and the decline of German unemployment: A macroeconomic evaluation. Journal of Economic Dynamics and Control, 127, 104114.
Hochmuth, Brigitte; Kohlbrecher, Britta; Merkl, Christian & Gartner, Hermann
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Incomplete Insurance and Open-Economy Spillovers of Labor Market Reforms, mimeo, October 2023.
Hochmuth, Brigitte; Christian Merkl & Heiko Stüber
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Labor Market Responses to Unemployment Insurance: The Role of Heterogeneity. American Economic Journal: Macroeconomics, 15(3), 388-430.
Birinci, Serdar & See, Kurt
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Public Employment Agency Reform, Matching Efficiency, and German Unemployment. IMF Economic Review, 72(1), 393-440.
Merkl, Christian & Sauerbier, Timo
