About 15 years ago, Germany implemented the Hartz labor market reforms. Since then German unemployment has dropped substantially (see Figure 1). The most controversial reform step was the so-called “Hartz IV” reform that reduced unemployment benefits for long-term unemployed. While macroeconomists agree that Hartz IV has reduced unemployment, there is no agreement by how much.
Figure 1: Registered Unemployment Rate for Germany, 1992-2018.
In order to quantify the macroeconomic effects of Hartz IV, it is necessary to use model-based simulations. Launov and Wälde (2013), Krebs and Scheffel (2013) and Krause and Uhlig (2012) analyze the effects of the reform on unemployment to employment transitions. However, they come up with very different quantitative results. While according to Launov and Wälde unemployment dropped by 0.1 percentage points due to Hartz IV, Krause and Uhlig find a 2.8 percentage point decline. A key reason for these differences is that each of these studies uses a different decline of the replacement rate for long-term unemployed as model input. The actual decline is difficult to measure due to complex institutional structures.
Overall, we find substantial effects of the Hartz IV reform on aggregate unemployment. According to our analysis, the reform has created at least one million additional jobs. Our paper only analyzes the positive dimension, which is an important prerequisite for a better understanding of normative aspects.
Chosen excerpts by Job Market Monitor. Read the whole story at What was the effect of Hartz IV on German unemployment?