Brigitte Hochmuth, University of Vienna (Job Market Seminar)

"Labor Market Reforms in Open Economies: Current Account Dynamics and Consumer Heterogeneity"

Abstract

This paper establishes a link between labor market reforms and an increase in the reforming country’s net foreign asset position via a precautionary savings channel. Specifically, we evaluate the current account effects of a major German labor market reform that reduced the generosity of unemployment benefits. Using a heterogeneous agent model of a small open economy with labor market frictions, we show that accounting for precautionary savings is qualitatively and quantitatively important for current account dynamics. In the first five years following its implementation, the reform contributed, on average, 13 percent to the dynamics of the German current account. Furthermore, welfare gains and losses are distributed unequally among agents. Compared to a closed economy, the reform is more detrimental.

Contact person: Søren Hove Ravn