Labor market reforms, precautionary savings, and global imbalances

Arbeitspapier

How do labor market reforms affect international competitiveness and net foreign assets? To answer this question, we build a two-region RBC model with labor market frictions, idiosyncratic consumption risk, and limited cross-sectional heterogeneity to establish a direct link between labor market reforms and changes in net foreign assets via a precautionary savings channel. We apply the model to simulate far-reaching labor market reforms in Germany during the mid-2000s. We find that reducing the generosity of unemployment benefits decreases wages, fosters employment and augments competitiveness as well as trade. In addition, we can explain a significant share of the observed increase in German net foreign assets. A standard representative agent framework is not able to generate any notable effects on net foreign assets and the current account.

Object Details

• ISBN: 978-3-95729-578-1
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Deutsche Bundesbank Discussion Paper ; No. 13/2019

Classification and Topics

• Classification: Wirtschaft ; Macroeconomics: Consumption; Saving; Wealth ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Trade and Labor Market Interactions ; Open Economy Macroeconomics
• Subject: unemployment benefits reform ; current account imbalances ; precautionary savings ; Hartz reform

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hochmuth, Brigitte ; Moyen, Stephane ; Stähler, Nikolai
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/195584
• Last update: 10.03.2025, 11:42 AM CET