Philip Jung

Optimal Labor-Market Policy in Recessions

We examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort we first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. We derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Our propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. We find this confirmed in a calibration targeted to the U.S. economy.

Has the Euro changed the Business Cycle

In contrast to the notion that the exchange-rate regime is non-neutral, there is little evidence that EMU has systematically changed the European business cycle. In fact, we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the euro. Exceptions are a strong decline in real exchange rate volatility and a considerable increase in cross-country correlations. To account for this finding, we develop a two-country business cycle model which is able to replicate key features of European data. In particular, the model correctly predicts a limited effect of EMU on standard business cycles statistics. However, further analysis reveals that the euro has changed the nature of the cycle through its impact on the transmission mechanism. Cross-country spillovers have become relatively more, domestic shocks relatively less important in accounting for economic fluctuations under EMU. This explains why there is little change in unconditional volatilities.

Labour Market Institutions and Worker Flows: Comparing Germany and the US

We compare labour market flows in the US and Germany between 1980 and 2004. In Germany, average worker flows in and out of unemployment are substantially lower; outflows are equally volatile in both countries; inflows are about twice as volatile in Germany and contribute more to the unemployment rate volatility. We explore four candidates for these differences: unemployment benefits; union bargaining power; employment protection and the efficiency of matching unemployed workers to open positions. We find that a lower matching efficiency in Germany can explain the bulk of the cross‐country differences. It amplifies the business cycle and adds persistence.

The Era of the U.S.-Europe Labor Market Divide: What Can We Learn?

Comparing labor markets in the United States and Germany as Europe’s largest economy over the period from 1980−2004 uncovers three stylized differences: (1) Germany’s mean transition rates from unemployment to employment (UE) were lower by a factor of 5 and transition rates from employment to unemployment (EU) were lower by a factor of 4. (2) The volatility of the UE rate was equal in both countries, but the EU rate was 2.3 times more volatile in Germany. (3) In Germany EU flows contributed 60−70% to unemployment volatility, whereas in the U.S. they contributed only 30−40%. Using a search and matching model we show theoretically that the joint analysis of first and second moments offers general identification restrictions on the underlying causes for these differences. We find that a lower efficiency in the matching process can consistently explain the facts while alternative explanations such as employment protection, the benefit system, union power, or rigid earnings can not. We document that a lower matching efficiency due to lower occupational and regional mobility in Germany finds strong support in the data. Finally, we show that the highlighted matching friction leads in the model calibrated to the German economy to a substantial amplification and propagation of shocks.