What Hides behind the German Labor Market Miracle? Unemployment Insurance Reforms and Labor Market Dynamics

By Benjamin Hartung, Philip Jung and Moritz Kuhn


A key question in labor market research is how the unemployment insurance system affects unemployment rates and labor market dynamics. We revisit this old question studying the German Hartz reforms. On average, lower separation rates explain 76% of declining unemployment after the reform, a fact unexplained by existing research focusing on job finding rates. The reduction in separation rates is heterogeneous, with long-term employed, high-wage workers being most affected. We causally link our empirical findings to the reduction in long-term unemployment benefits using a heterogeneous-agent labor market search model. Absent the reform, unemployment rates would be 50% higher today

I am really puzzled by the paper. Usually, when you have an economy with high unemployment rate, the job finding rate and the separation rate are both really low. A labor market reform then typically involves allowing the separation rate to increase, and then the job finding rate increases as well. But here, the separation rate decreased even further, with little consequence for the job finding rate. In other words, the labor market became even less flexible, yet the unemployment rate decreased substantially.


One Response to What Hides behind the German Labor Market Miracle? Unemployment Insurance Reforms and Labor Market Dynamics

  1. Moritz Kuhn says:

    One thing we point out in the paper is that the U.S. labor market might be not representative for labor markets in industrialized countries. We have learned a lot from studying the effect of UI reforms in situations when the separation margin does not adjust (exogenous separations).Empirical work has already shown that for most European countries changes in the separation rate are more important than changes in the job-finding rate to account for unemployment volatility over the business cycle. Our paper shows empirically and theoretically the importance of this channel for labor market mobility and unemployment rates after UI reforms. This makes us think that separation rate adjustments and their effect on unemployment rates is an underexplored mechanism in the literature on the effect of UI reforms on the labor market.

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