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In 2005 the German government implemented the so-called Hartz IV reform, which amounted to a complete overhaul of the German unemployment insurance system and resulted in a significant reduction in unemployment benefits for the long-term unemployed. In this paper, we use an incomplete-market model with search unemployment to evaluate the macro-economic and welfare effects of the Hartz IV reform. We calibrate the model economy to German data before the reform and then use the calibrated model economy to simulate the effects of Hartz IV. In our baseline calibration, we find that the reform has reduced the long-run (noncyclical) unemployment rate in Germany by 1.4 percentage points. We also find that the welfare of employed households increases, but the welfare of unemployed households decreases even with moderate degree of risk aversion.

Labor market --- Unemployment --- Unemployment insurance --- Insurance, Unemployment --- Unemployment benefits --- Unemployment compensation --- Income maintenance programs --- Insurance --- Joblessness --- Employment (Economic theory) --- Full employment policies --- Labor supply --- Manpower policy --- Underemployment --- Employees --- Market, Labor --- Supply and demand for labor --- Markets --- Econometric models --- Evaluation --- Supply and demand --- Households --- Population --- Families --- Home economics --- Economic aspects&delete& --- E-books --- Economic aspects --- Labor --- Public Finance --- Macroeconomics: Consumption --- Saving --- Wealth --- Employment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Incomplete Markets --- Human Capital --- Skills --- Occupational Choice --- Labor Productivity --- Unemployment: Models, Duration, Incidence, and Job Search --- Unemployment Insurance --- Severance Pay --- Plant Closings --- Demand and Supply of Labor: General --- Labour --- income economics --- Public finance & taxation --- Unemployment rate --- Human capital --- Labor markets --- Expenditure --- Germany --- Income economics

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This paper provides a quantitative evaluation of the macroeconomic, distributional, and fiscal effects of three reform proposals for Germany: i) a reduction in the social security tax in the low-wage sector, ii) a publicly financed expansion of full-day child care and full-day schooling, and iii) the further deregulation of the professional services sector. The analysis is based on a macroeconomic model with physical capital, human capital, job search, and household heterogeneity. All three reforms have positive short-run and long-run effects on employment, wages, and output. The quantitative effects of the deregulation reform are relatively small due to the smal size of professional services in Germany. Policy reforms i) and ii) have substantial macroeconomic effects and positive distributional consequences. Ten years after implementation, reforms i) and ii) taken together increase employment by 1.6 percent, potential output by 1.5 percent, real hourly pre-tax wages in the low-wage sector by 3 percent, and real hourly pre-tax wages of women with children by 2.7 percent. The two reforms create fiscal deficits in the short run, but they also generate substantial fiscal surpluses in the long-run. They are fiscally efficient in the sense that the present value of short-term fiscal deficits and long-term surpluses is positive for any interest (discount) rate less than 9 percent.

Structural adjustment (Economic policy) --- Fiscal policy --- Econometric models. --- Aggregate Human Capital --- Aggregate Labor Productivity --- Economic theory --- Employment --- Human Capital --- Human capital --- Income economics --- Intergenerational Income Distribution --- Labor Productivity --- Labor --- Labour --- Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General --- Occupational Choice --- Personal Income and Other Nonbusiness Taxes and Subsidies --- Skills --- Social security contributions --- Social security --- Taxation --- Taxes --- Unemployment --- Unemployment: Models, Duration, Incidence, and Job Search --- Wages --- Wages, Compensation, and Labor Costs: General --- Welfare & benefit systems --- Germany

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