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What Accounts for the German Labor Market Miracle? A Structural VAR Approach

Published online by Cambridge University Press:  11 January 2022

Mathias Klein  and
Stefan Schiman
Mathias Klein
Affiliation:
Sveriges Riksbank, Monetary Policy Department–Research, SE-10337 Stockholm, Sweden
Stefan Schiman*
Affiliation:
Austrian Institute of Economic Research (WIFO), Arsenal 20, A-1030 Wien, Austria
*
*Corresponding author. Email: [email protected]
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Abstract

This study examines the driving forces behind the strong decline in German unemployment from 2005 onwards and the exceptionally small increase during the Great Recession. Structural vector autoregressions (VARs) with sign restrictions show that wage moderation in the aftermath of labor market reforms was the dominant factor of the unemployment decline, and that improved matching and shrinking labor supply also contributed to it. The adjustment to business cycle shocks (Great Recession), on the other hand, is to a large extent borne by the intensive margin, which can be explained by institutional aspects of the German labor market.

Keywords

German labor market miraclestructural VARsign restrictionsE24E32
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 3 , April 2023 , pp. 794 - 825
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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