Brigitte Hochmuth (Friedrich-Alexander-Universität Erlangen Nürnberg), Britta Kohlbrecher (Friedrich-Alexander-Universität Erlangen Nürnberg), Christian Merkl (Friedrich-Alexander-Universität Erlangen Nürnberg; IZA), and Hermann Gartner (Institute for Employment Research (IAB)).
This paper proposes a new approach to evaluate the macroeconomic effects of the Hartz IV reform in Germany, which reduced the generosity of long-term unemployment benefits. We propose a model with different unemployment durations, where the reform initiates both a partial and a general equilibrium effect. The relative importance of these two effects and the size of the partial effect are estimated based on the IAB Job Vacancy Survey. Our indirect inference method provides a solution for the existing disagreement in the macroeconomic literature on Hartz IV. We find that Hartz IV was a major driver for the decline of Germany’s unemployment. In addition, we contribute to the literature on microeconomic and macroeconomic effects of unemployment benefit changes.