Labor Market Institutions and the Cost of Recessions

Tom Krebs, Martin Scheffel

Research output: Book/ReportCommissioned report


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.
Original languageEnglish
PublisherInternational monetary fund
Number of pages85
ISBN (Print)9781475592245
Publication statusPublished - 2017
MoE publication typeD4 Published development or research report or study

Publication series

NameIMF Working Paper
ISSN (Print)1018-5941


  • 511 Economics
  • unemployment insurance
  • cost of recession
  • labor market
  • recession shock
  • job destruction rate
  • unemployment rate
  • effort cost of recession
  • output loss
  • cost reduction


Dive into the research topics of 'Labor Market Institutions and the Cost of Recessions'. Together they form a unique fingerprint.

Cite this