LABOUR MARKET REFORMS FOR EUROPE AFTER THE CRISIS

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1 WELFARE, WEALTH AND WORK A NEW GROWTH PATH FOR EUROPE A European research consortium is working on the analytical foundations for a new socio-ecological growth model LABOUR MARKET REFORMS FOR EUROPE AFTER THE CRISIS Claudia Busl Centre for European Economic Research (ZEW) WWWforEurope Conference on Social and Environmental Progress: Europe in a Long-Run Perspective Atılım Seymen Deutsche Bundesbank 24/02/2015

2 Disclaimer The views in this presentation represent the authors' personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. 1 WWWforEurope Conference, 24/02/2015

3 Two Underlying Papers Claudia Busl & Atılım Seymen, "(Spillover) Effects of Labour Market Reforms in Germany and France," WWWforEurope Working Papers series 8, WWWforEurope. Busl, Claudia & Seymen, Atılım, "The German labour market reforms in a European context: A DSGE analysis," ZEW Discussion Papers WWWforEurope Conference, 24/02/2015

4 Motivation I Hartz reforms launched in four law packages in the period in order to deal with a protracted unemployment problem Policy alternative for other countries? Four observations in the period : (1) Decline in unemployment from 9.3% to 7.1% (2) Increase in GDP (consumption) of 8.6% (3.6%) consumption dampening (3) Rise in labor productivity (real wages) of 5.7% (0.7%) wage restraint (4) Current account surpluses exceeding 5% of GDP after 2005 A widespread consensus that the Hartz reforms led to the decline in the unemployment rate to a large extent Yet, the role of the reforms in the other three developments in the German data less clear-cut 3 WWWforEurope Conference, 24/02/2015

5 Motivation II Critics of the Hartz reforms often claim that the reforms led to: Wage restraint/moderation Consumption dampening Beggar-thy-neighbour effects harming the trade partners The issue has not been studied from this perspective in the academia up to now Other factors may also have had an effect on those phenomena 4 WWWforEurope Conference, 24/02/2015

6 Motivation III Our objective in the latter study: To quantify the role of the Hartz reforms in the foregoing developments in the German macroeconomic data By means of a two-country DSGE model with search and matching frictions calibrated to Germany and the rest of the EA 5 WWWforEurope Conference, 24/02/2015

7 Background and Contributions The Hartz reforms with two main components: (1) Hartz I-II-III: Measures to increase the efficiency of matching the unemployed with vacancies in firms (2) Hartz IV: Reduction in the unemployment benefit ratio A crucial aspect of our study: Both reform components evaluated in a unifying framework important because of possible interactions (Coe and Snower (1997), Daveri and Tabellini (2000), Blanchard and Giavazzi (2003), Belot and Ours (2004)) 6 WWWforEurope Conference, 24/02/2015

8 Laboratory: Two-Country DSGE Model Two-country model of Fonseca, Patureau, Sopraseuth (2009) Each country specializing in the production of her own good consumers in both countries consume a composite good comprising the goods of both countries trade International financial assets: no-risk interest rate bond Search and matching frictions in the labour market unemployment and labour market institutions 7 WWWforEurope Conference, 24/02/2015

9 Quantification of Reforms in Our Model %20 percent increase in the matching efficiency in the labour market Fahr and Sunde (2009); 10-15% increase within a very short period after the introduction of the reforms; Klinger and Rother (2012) similar result; Hertweck and Sigrist (2013) 12-31% percentage point reduction in the unemployment benefit ratio 8 WWWforEurope Conference, 24/02/2015

10 Related Literature: Effects of Hartz Reforms Krause and Uhlig (2012), Krebs and Scheffel (2013), Launov and Wälde (2010), Nie (2010) Only domestic economy considered Main focus on unemployment ratio and output as well as distributional effects; the «controversy» not addressed 9 WWWforEurope Conference, 24/02/2015

11 Calibration and Simulation Strategy Homogeneous calibration of most parameters across Germany and the rest of the euro area Long-run averages or standard values from the literature Heterogeneous calibration w.r.t. a few parameters and steady state values concerning the labour market Initial calibration w.r.t values Simultaneous introduction of the two Hartz reform components 10 WWWforEurope Conference, 24/02/2015

12 Calibration of Heterogeneity Important changes in Germany between 2003 and 2010: Lower unemployment rate Lower unemployment benefit ratio Higher matching efficiency (Fahr and Sunde (2009), Hertweck and Sigrist (2013)) 11 WWWforEurope Conference, 24/02/2015

13 In the forthcoming slides Nh Total hours worked N Number of employees U Unemployment rate Job finding probability h Hours worked per worker w Wage Y C I TOT Output Consumption Investment Terms of trade Matching efficiency Unemployment benefit 12 WWWforEurope Conference, 24/02/2015

14 Steady State Percentage Change Scenarios: 20% increase in matching efficiency (Hartz I-II-III) percentage point decline in the unemployment benefit ratio (Hartz IV) Combination of both Comparing 2003 and 2010 fine, because business cycle effects roughly cancel out Individual and simultaneous introduction of reforms makes a difference 13 WWWforEurope Conference, 24/02/2015

15 Steady State Percentage Change Trends in German data over can partly be traced back to Hartz reforms Sign of change correct with the exception of wages Including trend TFP growth of 4.4% could fill some of the gap between the data and model; but not entirely; it would also correct the sign of change in wages 14 WWWforEurope Conference, 24/02/2015

16 Steady State Percentage Change 15 WWWforEurope Conference, 24/02/2015

17 Steady State Percentage Change Very small positive spillovers; in line with the literature Employment effects negligible; output/consumption effects more visible 16 WWWforEurope Conference, 24/02/2015

18 Adjustment after a simultaneous 20% increase in matching efficiency and percentage point decline in the unemployment benefit ratio (red dashed line: Germany) Positive TOT effect on the trade partner 17 WWWforEurope Conference, 24/02/2015

19 Adjustment after a simultaneous 20% increase in matching efficiency and percentage point decline in the unemployment benefit ratio (red dashed line: Germany) Positive trade balance of trade partner and bond accumulation by her which are evened out very slowly after roughly 8 years 18 WWWforEurope Conference, 24/02/2015

20 Conclusion The unemployment reduction as well as other developments in German macroeconomic data that we report due to Hartz reforms in line with the existing literature Hartz reforms explain the consumption restraint / wage moderation only to a limited / very limited extent and do not account for the large current account and trade surpluses in our DSGE framework Decline in bargaining power of workers and non-price competitiveness factors further important with respect to the discrepancy between our results and the data Finding in line with the results of recent literature Useful framework for evaluating reform possibilities in other countries Our first paper gives an example of the evaluation of reform possibilities in France. 19 WWWforEurope Conference, 24/02/2015