Labor Market Adjustment to Macroeconomic Shocks: Institutions and Short-Time Work

• Applicant: Professor Dr. Christian Merkl
• Subject Area: Economic Policy, Applied Economics ; Economic Theory
• Term: since 2026
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 568479736

Despite the two most severe post-war recessions in 2008/09 and 2020, German unemployment remained stable. Furthermore, around 20 years ago, GDP and employment decoupled in Germany. Both trends coincided with the large scale use of short-time work (STW) during these recessions and the implementation of the Hartz labor market reforms starting in 2003. However, research on the macroeconomic effects of STW, in particular the role of financially constrained firms, as well as on the connection between labor market resilience and the Hartz reforms that could explain these trends is scarce. Thus, our DFG project aims at gaining deep insights into the role of (reformed) labor market institutions and the interaction of financially constrained firms with STW in enhancing resilience to macroeconomic shocks. We propose three steps, with each step employing structural macroeconomic modeling, simulation tools, and rich microeconomic data, primarily sourced from the Institute for Employment Research (IAB) in Nuremberg. In the first step, we plan to use two microeconomic datasets (BeCovid and IAB Establishment Panel) to analyze how the use of STW and other adjustment margins differ between financially constrained and non-constrained firms. The empirical patterns will inform a macroeconomic labor market model with financial frictions and STW, which will be used for counterfactual macroeconomic analyses. In such an environment, STW may have larger macroeconomic effects, as it rescues constrained firms. In the second step, we will use a search and matching model with a private and a public search markets to analyze how the Hartz labor market reforms changed the macroeconomic reactions of the labor market to aggregate shocks. The simulated theoretical model will be disciplined by microeconomic datasets such as the Socio-Economic Panel (SOEP). Counterfactual simulations will allow us to quantify the contributions of activation policies and reformed labor market institutions under Hartz III, reduced benefits under Hartz IV, and STW to the GDP-employment decoupling in Germany. In the third step, we will analyze nonlinear labor adjustment at the firm level based on the Establishment History Panel (BHP). We will identify potential drivers for these nonlinear labor adjustments, such as financial constraints or different wage cyclicalities at the firm level. Based on the empirical insights, we will build a suitable macroeconomic labor market model to analyze these nonlinearities and the interaction with STW. This will improve the cost-benefit analysis of STW during different business cycle phases.

• DFG Programme: Research Grants