The German Labor Market Reforms and Post-Unemployment Earnings

In 2003–05, Germany undertook extensive labor market reforms which werefollowed by a large and persistent decline in unemployment. Key elements of thereforms were a drastic cut in benefits for the long-term unemployed and tighter jobsearch and acceptance obligations. Using a large confidential data set from theGerman social security administration, we find that the reforms were associatedwith a fall in the earnings of workers returning to work from short-termunemployment relative to workers in long-term employment of about 10 percent.We interpret this as evidence that the reforms strengthened incentives to return towork but, in doing so, they adversely affected post re-entry earnings.