Labor Market Institutions and the Cost of Recessions

Tom Krebs, Martin Scheffel

Forskningsoutput: Bok/rapportBeställd rapport


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.
FörlagInternational monetary fund
Antal sidor85
ISBN (tryckt)9781475592245
StatusPublicerad - 2017
MoE-publikationstypD4 Publicerad utvecklings- eller forskningsrapport eller -utredning


NamnIMF Working Paper
ISSN (tryckt)1018-5941


  • 511 Nationalekonomi


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