Niklas Engbom, Enrica Detragiache, and Faezeh Raei
INTERNATIONAL MONETARY FUND
In 2003-05, Germany undertook extensive labor market reforms which were
followed by a large and persistent decline in unemployment. Key elements of the
reforms were a drastic cut in benefits for the long-term unemployed and tighter job
search and acceptance obligations. Using a large confidential data set from the
German social security administration, we find that the reforms were associated
with a fall in the earnings of workers returning to work from short-term
unemployment relative to workers in long-term employment of about 10 percent.
We interpret this as evidence that the reforms strengthened incentives to return to
work but, in doing so, they adversely affected post re-entry earnings.