School of Economics

The Fall in German Unemployment: A Flow Analysis

3 May 2018

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by Carlos Carrillo-Tudela, University of Essex, CEPR, CESifo and IZA; Andrey Launov, University of Kent, CESifo and IZA; and Jean-Marc Robin, Sciences Po and UCL. Discussion paper KDPE 1805, March 2018.

Non-technical summary:

In this paper we investigate the recent fall in unemployment, and the rise in part-time work, labour market participation, inequality and welfare in Germany. Unemployment fell because the Hartz IV reform induced a large fraction of the long-term unemployed to deregister as jobseekers and appear as non-participants. Yet, labour force participation increased because many unregistered-unemployed workers ended up accepting low-paid part-time work that was offered in quantity in absence of a universal minimum wage. A large part of the rise in part-time work was also due to the tax benefits Hartz II introduced to take up a mini-job as secondary employment. This has provided an easy way to top-up labour income staggering under the pressure of wage moderation. The rise in part-time work led to an increase in inequality at the lower end of income distribution. Overall we find that Germany increased welfare as unemployment fell.

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