Labour market reforms , search and matching , spillover , dynamic stochastic general equilibrium models
Abstract:
While a widespread consensus exists among macroeconomists that the German labour market
reforms in 2003-2005 have successfully contributed to the decline of the unemployment rate, critics
claim that the reforms led to wage restraint and consequently consumption dampening accompanied
by beggar-thy-neighbour effects, harming Germany’s trade partners. We check up on the validity of
these arguments by means of a two-country DSGE model featuring intra-industry trade and labour
market frictions. Our results suggest that the disproportional growth of GDP (labour productivity)
in comparison to consumption (wages) are only partially driven by the reforms. However, we do
not find that the reforms contribute to Germany’s trade surplus and cause negative spillovers to
trading partners in terms of output and employment.
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