Abstract
This chapter analyses fiscal and labour market reforms in Germany using an extended version of the medium-scale open economy DSGE model FiMod. The simulations suggest that the labour market reforms had a positive impact on GDP, consumption and employment. However, the reforms also increased consumption inequality and negatively affected liquidity-constrained households by reducing their steady-state consumption level. These unintended redistributional effects of the reform were mitigated by a change in the composition of the tax mix as shown by the simulations. If these tax changes are fiscally budget-neutral, no adverse effects from higher financing costs occur.
The chapter has benefited from the useful comments and suggestions made by Johannes Hoffmann, Josef Hollmayr and Karsten Wendorff. The views expressed are those of the authors and do not necessarily reflect the opinions of the Deutsche Bundesbank.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Although the German reform package implemented between 1999 and 2008 did not represent a fully coordinated programme in a strict sense, it provides a vivid example of the interaction of fiscal and labour market reforms.
- 2.
A detailed description of the model is presented in Gadatsch et al. (2016).
- 3.
For the standard setup of a typical New-Keynesian DSGE model, see Smets and Wouters (2003, 2007) or Christiano et al. (2005). Moyen and Sahuc (2005), Christoffel et al. (2009) and Boscá et al. (2011), among others, provide an overview of how to include a search labour market into a New- Keynesian DSGE framework.
- 4.
From 2008 on, the maximum duration of unemployment benefit was extended to 24 months for workers aged 58 and above.
- 5.
Note that while the level of long-term unemployment assistance decreased with the introduction of Hartz IV, the level of social welfare assistance actually increased.
- 6.
The reduction in the entitlement duration for unemployment benefits is modelled as an increase in the probability of moving from short to long-term unemployment, while the merging of means-tested unemployment and social assistance benefits into unemployment benefits II is taken into account by reducing the replacement rate of long-term unemployed, with benefits designed as a fixed payment independent of previous wages, and increasing social assistance. With regard to Hartz III, the reform is simulated as a 10% increase in the aggregate matching function’s efficiency which is in line with the recent empirical literature.
- 7.
Note that besides having unrestricted access to capital markets, only optimising households are assumed to own firms and hence to be entitled to dividends.
- 8.
In this respect, it might be noted that the German deficit-to-GDP ratio actually exceeded the 3% threshold during the period from 2001 to 2005, which was also a time of major labour tax reductions. However, these developments can, first and foremost, be explained by an unexpected shortfall in taxes related to firms’ profits and not by compensating measures to compensate those who lose from the labour market reform.
- 9.
For simplicity, we refrain from decreasing the capital interest taxation in this simulation, which is present when simulating the entire reform agenda. However, the inclusion of lower capital interest taxes (when financed by higher consumption taxes) would increase the positive macroeconomic effects further and augment consumption, especially of optimising households, because capital taxes generally produce the largest distortions in this class of models (see Kempkes and Stähler 2016, for a more in-depth discussion). Still, liquidity-constrained households, who we want to be compensated for the losses resulting from the labour market reform, would only benefit indirectly.
- 10.
Note that the SGP already allows taking into account reform efforts in calculating the deficit path (see European Economy, 2016). As our analysis shows, further alleviations do not necessarily seem appropriate.
References
Attinasi MG, Prammer D, Stähler N, Tasso M, van Parys S (2016) Budget-neutral labour tax wedge reductions: a simulation-based analysis for selected euro area countries. Deutsche Bundesbank discussion paper 26/2016
Baxter M, King RG (1993) Fiscal policy in general equilibrium. Am Econ Rev 83:315–334
Blanchard O, Giavazzi F (2003) Macroeconomic effects of regulation and deregulation in goods and labor markets. Q J Econ 118:879–907
Boscá J, Doménech R, Ferri J (2011) Search, Nash bargaining and rule-of-thumb consumers. Eur Econ Rev 55:927–942
Busl C, Seymen A (2013) The German labour market reforms in a European context: a DSGE analysis. ZEW discussion paper 13-097.
Cacciatore M, Fiori G (2016) The macroeconomic effects of goods and labor market deregulation. Rev Econ Dyn 20:1–24
Cacciatore M, Duval R, Fiori G (2016a) Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies. J Int Money Finance 68:358–385
Cacciatore M, Duval R, Fiori G, Ghironi F (2016b) Market deregulation and optimal monetary policy in a monetary union. J Int Econ 99:120–127
Cacciatore M, Duval R, Fiori G, Ghironi F (2016c) Market reform in the time of imbalance. J Econ Dyn Control 72:69–93
Calvo G (1983) Staggered prices in a utility-maximizing framework. J Monet Econ 12:383–398
Christiano L, Eichenbaum M, Evans C (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. J Polit Econ 113:1–45
Christoffel K, Coenen G, Warne A (2008) The new area-wide model of the euro area: a micro-founded open-economy model for forecasting and policy analysis. ECB working paper 944
Christoffel K, Kuester K, Linzert T (2009) The role of labor markets for euro area monetary policy. Eur Econ Rev 53:908–936
Coenen G, Straub R, Trabandt M (2013) Gauging the effects of fiscal stimulus packages in the euro area. J Econ Dyn Control 37:367–386
Corsetti G, Kuester K, Meier A, Müller G (2013) Sovereign risk, fiscal policy, and macroeconomic stability. Econ J 123:F99–F132
Dao M (2013a) International spillovers of labour market policies. Oxf Econ Pap 65:417–446
Dao (2013b) Foreign labor costs and domestic employment: what are the spillovers? J Int Econ 89:154–171
ECB (2015) Measurement of the costs and benefits of the German labour market reforms of the early 2000s. Econ Bull 7(November):65–68
Engler P, Ganelli G, Trevala J, Voigts S (2017) Fiscal devaluation in a monetary union. IMF Econ Rev 65:241–272
European Commission (2014) Taxation trends in the European Union, 2014 Edition
European Commission (2016) The economic impact of selected structural reform measures in Italy, France, Spain and Portugal. European economy, Institutional papers 23
Farhi E, Gopinath G, Itskhoki O (2014) Fiscal devaluations. Rev Econ Stud 81:725–760
Felbermayr GJ, Larch M, Lechthaler W (2012) The Shimer-puzzle of international trade: a quantitative analysis. Ifo working paper 134
Felbermayr GJ, Larch M, Lechthaler W (2013) Unemployment in an interdependent world. Am Econ J Econ Pol 5:262–301
Gadatsch N, Stähler N, Weigert B (2016) German labor market and fiscal reforms 1999–2008: can they be blamed for intra-euro area imbalances? J Macroecon 50:307–324
Galí J, Lopez-Salido JD, Valles J (2007) Understanding the effects of government spending on consumption. J Eur Econ Assoc 5:227–270
Gomes S, Jacquinot P, Mohr M, Pisani M (2013) Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment. Int Finance 16:23–44
Gomes S, Jacquinot P, Pisani M (2016) Fiscal devaluation in the euro area: a model-based assessment. Econ Model 52:58–70
IMF (2016) Time for a supply-side boost? Macroeconomic effects of labor and product market reforms in advanced economies. World Economic Outlook, April 2016
Kempkes G, Stähler N (2016) A one-off wealth levy? Discussing the pros, the cons, and the importance of credibility. Fisc Stud 37:821–849
Krause M, Uhlig H (2012) Transitions in the German labor market: structure and crisis. J Monet Econ 59:64–79
Krebs T, Scheffel M (2013) Macroeconomic evaluation of labor market reform in Germany. IMF Econ Rev 61:664–701
Krebs T, Scheffel M (2017) Labor market institutions and the cost of recessions. IMF working paper 17/87
Langot F, Patureau L, Sopraseuth T (2014) Fiscal devaluation and structural gaps. Banque der France working paper 508
Launov A, Wälde K (2013) Estimating incentive and welfare effects of non-stationary unemployment benefits. Int Econ Rev 54:1159–1198
Le Blanc J, Porpiglia A, Teppa F, Zhu J, Ziegelmeyer M (2014) Household saving behavior and credit constraints in the euro area. Deutsche Bundesbank discussion paper 16/2014
Leeper E, Walker TB, Yang SCS (2010) Government investment and fiscal stimulus. J Monet Econ 57:1000–1012
Leiner-Killinger N, Lopéz Peréz V, Stiegert R, Vitale G (2007) Structural reforms in EMU and the role of monetary policy: a survey of the literature. ECB occasional paper 66
Lipinska A, von Thadden L (2009) Monetary and fiscal policy aspects of indirect tax changes in a monetary union. ECB working paper 1097
Lipinska A, von Thadden L (2012) On the (in)effectiveness of fiscal devaluations in a monetary union. Board of Governors of the Federal Reserve System Finance and Economics discussion paper 2012-71
Moyen S, Sahuc JG (2005) Incorporating labour market frictions into an optimising-based monetary policy model. Econ Model 22:159–186
OECD (2016) Economic policy reforms 2016. Going for growth interim report, February 2016
Parleviet J (2015) What drives public acceptance of reforms? Longitudinal evidence from the run-up of the increase of the Dutch retirement age. DNB working paper 492
Picos-Sánchez F, Thomas A (2015) A revenue-neutral shift from SSC to VAT: analysis of the distributional impact of 12 EU-OECD countries. FinanzArchiv/Public Financ Anal 71:278–298
Schwarzmüller T, Stähler N (2013) Reforming the labor market and improving competitiveness: an analysis for Spain using FiMod. J Span Econ Assoc 4:437–471
Smets F, Wouters R (2003) An estimated stochastic general equilibrium model of the euro area. J Eur Econ Assoc 1:1123–1175
Smets F, Wouters R (2007) Shocks and frictions in US business cycles: a Bayesian DSGE approach. Am Econ Rev 97:586–606
Stähler N, Thomas C (2012) FiMod—A DSGE model for fiscal policy simulations. Econ Model 29:239–261
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2018 Springer International Publishing AG, part of Springer Nature
About this chapter
Cite this chapter
Röhe, O., Stähler, N. (2018). Coordinated Structural Reforms: Insights from Fiscal and Labour Market Reforms in Germany. In: de Haan, J., Parlevliet, J. (eds) Structural Reforms. Springer, Cham. https://doi.org/10.1007/978-3-319-74400-1_10
Download citation
DOI: https://doi.org/10.1007/978-3-319-74400-1_10
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-74399-8
Online ISBN: 978-3-319-74400-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)