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This paper is based on research conducted for the German Ministry for Economic Affairs and Energy (BMWi). We thank members of the ministry, in particular Kai Hielscher, Christoph Menzel, Stefan Profit, and Jeromin Zettelmeyer, for numerous suggestions and comments. Tom Krebs thanks the IMF Research Department for its hospitality, and Enrica Detragiache and Romain Duval for useful comments. The usual disclaimer applies.
The unemployment rate is the harmonized unemployment rate according to the OECD statistics in 2015. Note that in line with an exceptionally low unemployment rate, the employment rate in Germany is quite high (74 percent in 2014 and in Q3 2015 according to OECD statistics). The budget surplus of the German government amounted to 0.6 percent of GDP in 2015 according to the German Statistical Office (Statistisches Bundesamt). The average growth rate of per capital output is computed for the 6-year period 2010-2015 using data from the German Statistical Office.
In 2014, 22 percent of employment in Germany was part-time employment and 12 percent was marginal employment (mini-jobs) according to the German Statistical Office. See Krebs and Scheffel (2015) for a detailed discussion of the data on marginal employment and part-time employment.
We focus on the professional services since this sector has often been singled out as one of the service sectors in Germany with the largest potential for deregulation (Arentz et al., 2015, and Canton, et al., 2014).
The model neglects several channels that could further increase the economic benefits of the three reform proposals, and in this sense the results presented here provide a lower bound on the true benefits of reform. Specifically, the analysis neither takes into account the effect of schooling on the human capital of children nor does it allow for a labor-leisure choice along the intensive margin. Further, the macroeconomic model analyzed here does not have a Keynesian aggregate demand channel.
IMF (2014) considers a deregulation of the German service sector and finds positive output effects that are much larger than the 0.14 percent we find here. However, the analysis in IMF (2014) assumes that the deregulation reform can reduce markups substantially in the entire service sector, which comprises more than half of the German economy, whereas the current paper considers the deregulation of the professional service sector, which only comprises 3 percent of the German economy. Note also that our analysis does not take into account entry and exit of firms, a channel through which deregulation could improve aggregate TFP in the professional service sector itself.
Here ct stands for the function mapping partial histories, st, into consumption levels ct(st), with similar notation for the other household variables.
Note also that in (4) we focus on the resource cost of human capital investment, but we can easily introduce time cost of human capital investment without loosing tractability.
Note that in (4) we have explicitly imposed a non-negativity constraint on the stock of human capital, and our general characterization of the household decision rule (proposition 1) holds with this constraint imposed. Of course, for a certain range of parameter values this constraint binds in equilibrium, but for the parameter values used in our quantitative analysis this constraints never binds (does not bind for all households types and uncertainty states).
We follow the standard approach and define low-wage sector as all workers whose monthly (pre-tax) earnings is below 2/3 of the monthly median earnings. We compute these numbers based on the model distribution.
We assume that this cost is 0.2 percent of GDP in all future years, which means that we assume that it rises in step with the growth of GDP.