Labor Market Institutions and the Cost of Recessions

April 3, 2017

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Format: Chicago

Tom Krebs, and Martin Scheffel. Labor Market Institutions and the Cost of Recessions, (USA: International Monetary Fund, 2017) accessed December 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper studies the effect of two labor market institutions, unemployment insurance (UI) and job search assistance (JSA), on the output cost and welfare cost of recessions. The paper develops a tractable incomplete-market model with search unemployment, skill depreciation during unemployment, and idiosyncratic as well as aggregate labor market risk. The theoretical analysis shows that an increase in JSA and a reduction in UI reduce the output cost of recessions by making the labor market more fluid along the job finding margin and thus making the economy more resilient to macroeconomic shocks. In contarst, the effect of JSA and UI on the welfare cost of recessions is in general ambiguous. The paper also provides a quantitative appliation to the German labor market reforms of 2003-2005, the so-called Hartz reforms, which improved JSA (Hartz III reform) and reduced UI (Hartz IV reform). According to the baseline calibration, the two labor market reforms led to a substantial reduction in the output cost of recessions and a moderate reduction in the welfare cost of recessions in Germany.

Subject: Job destruction, Labor, Labor market institutions, Labor markets, Unemployment, Wages

Keywords: Cost of recession, Cost of Recessions, Europe, German Labor Market Reform, Hartz III reform, Hartz IV reform, Job destruction, Labor market, Labor Market Institutions, Labor markets, Output cost, Unemployment, Unemployment insurance, Wages, Welfare cost, WP

Publication Details

Pages:

85
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/087
Stock No:

WPIEA2017087
ISBN:

9781475592245
ISSN:

1018-5941

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