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International Monetary Fund

directly and to increase job search efficiency. These policies have been grouped under the label of “active labor market policies” (ALMPs). 25 Indeed, during the second half of the 1990s, employment performance improved appreciably in several European countries, especially in France, raising the presumption that such policies actually worked. 34. This chapter evaluates the aggregate effect of ALMPs on employment and wages and finds a positive correlation between spending on ALMPs as a percentage of GDP and the employment rate in the business sector in the 1990s, but

Mr. Tom Krebs and Mr. Martin Scheffel
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.
Mr. Tom Krebs and Mr. Martin Scheffel

recursive equilibria. In the model, unemployed workers choose the intensity of job search and unemployment leaves permanent scars. Further, job destruction rates and job search efficiency vary exogenously with business cycle conditions and the government provides JSA and UI at levels that are independent of business cycle conditions. Recessions are costly since they i) generate temporary and permanent output losses and ii) have additional welfare consequences due to distributional effects and costly search effort. Second, we use a simplified version of the model to

Mr. Marcello M. Estevão
Using panel data for 15 industrial countries, active labor market policies (ALMPs) are shown to have raised employment rates in the business sector in the 1990s, after controlling for many institutions, country-specific effects, and economic variables. Among such policies, direct subsidies to job creation were the most effective. ALMPs also affected employment rates by reducing real wages below levels allowed by technological growth, changes in the unemployment rate, and institutional and other economic factors. However, part of this wage moderation may be linked to a composition effect because policies were targeted to low-paid individuals. Whether ALMPs are cost-effective from a budgetary perspective remains to be determined, but they are certainly not substitutes for comprehensive institutional reforms.
Mr. Tom Krebs and Mr. Martin Scheffel

significant part of the decrease in the unemployment rate observed in the period 2005-2008 (see figure 1 ) can be attributed to the Hartz IV reform and amounts to a permanent reduction in the unemployment rate. Table 1. Calibration Parameter Meaning Value p e,su transition probability E → SU 0.0148 p su,lu transition probability SU → LU 0.25 p lu,su transition probability LU → SU 0.19 λ su search efficiency of short-term unemployed 0.724 λ lu search efficiency of long-term unemployed 0

Mr. Tom Krebs and Mr. Martin Scheffel
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.
Dominique M. Gross

workers. An often-neglected aspect of immigration is the job-creation effect of immigrants. Independently of their participation in the labor market, immigrants create jobs through their demand for goods and services thereby benefitting local workers immediately. 5 At constant wages, the effect on local unemployment depends, among other factors, on immigrants’ spending on consumption goods relative to natives’ and on the types of returns to scale in production. However, new immigrants, once they enter the labor market also have an adverse effect on the search

Mrs. Nujin Suphaphiphat and Hiroaki Miyamoto

market services, passive, and active labor market policies . The Eurostat database breaks down labor market policies intervention into three main categories: (i) labor market services; (ii) passive labor market policies (PLMPs); and (iii) active labor market policies (ALMPs). Labor market services cover all services of the PES and any other publicly funded services for jobseekers. It generally includes “services and sanctions” and aims at enhancing job search efficiency (see labor market matching efficiency section). Second, PLMPs cover financial supports that aim to

Niklas Engbom, Ms. Enrica Detragiache, and Ms. Faezeh Raei
In 2003–05, Germany undertook extensive labor market reforms which were followed by a large and persistent decline in unemployment. Key elements of the reforms were a drastic cut in benefits for the long-term unemployed and tighter job search and acceptance obligations. Using a large confidential data set from the German social security administration, we find that the reforms were associated with a fall in the earnings of workers returning to work from short-term unemployment relative to workers in long-term employment of about 10 percent. We interpret this as evidence that the reforms strengthened incentives to return to work but, in doing so, they adversely affected post re-entry earnings.
Niklas Engbom, Ms. Enrica Detragiache, and Ms. Faezeh Raei

unemployment with the 2001-03 recession and famously dubbed by the Economist magazine “The Sick Man of Europe”, Germany set out to drastically reshape its approach to unemployment insurance. B. The Hartz Reform Package The Hartz I–IV legislative package was approved in 2002–03 and implemented gradually from January 2003 to January 2005 ( Table 1 ). The first three stages of the reforms (Hartz I–III) sought to improve job search efficiency and employment flexibility. They included deregulation of the temporary work sector to give individual employers more flexibility