Cournot Seminar – Christian MERCK (Friedrich-Alexander Universität Erlangen)

Event details :

Incomplete Insurance and Open-Economy Spillovers of Labor Market Reforms

co-written with Brigitte Hochmuth and Heiko Stüber

This paper analyzes the open-economy spillover effects of unemployment benefit reforms under incomplete consumption insurance in a two-country model. When government-provided unemployment insurance is reduced, employed households increase precautionary savings to self insure against unemployment. Part of these savings flow to the non-reforming country. While this creates short-run positive spillover effects, long-run consumption in the non-reforming country is permanently reduced due to negative net foreign assets. We are the first to establish this new dimension of spillover effects that is particularly relevant for the Euro zone. To discipline our quantitative model exercise, we estimate the increase of Germany’s tradable sector in the aftermath of the Hartz unemployment insurance reform based on two firm-level microeconomic datasets. Our quantitative model matches a sizable fraction of various macroeconomic trends after the reform, namely Germany’s real exchange rate depreciation, the persistent increase of aggregate savings and net foreign assets, the increase of net exports, and the decline in unemployment. The reform leads to a more than 1 percent permanent decline of consumption in the rest of the Eurozone. We show that the interaction of incomplete insurance and labor market reforms is key for these results. In contrast, Germany’s wage moderation prior to the reform appears to be unrelated to most of these phenomena.

Zoom link : https://cnrs.zoom.us/j/93764575933?pwd=UmtBaFFVOUxMcGFlM2Q0RU9CeEQwQT09