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What hides behind the German labor market miracle? Unemployment insurance reforms and labor market dynamics
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. Reduction in separation rates are
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.
