Labor Market Reforms, Hysteresis, and Business Cycles in Germany: A SVAR Approach to Explain Unemployment Developments

Since the 1970s the German economy suffered from a pattern of step-wise rises in unemployment which was only broken during the last expansion in economic activity as the unemployment rate dropped to levels unseen since the 1990s. Against the backdrop of recent major labor market reforms this raises the question about the reasons for these shifts in unemployment over time. Therefore this study performs a time series analysis to examine the different impacts of institutional factors, cyclical shocks and hysteresis on unemployment in West Germany. This is done firstly via a descriptive comparative approach and secondly by estimating an autoregressive model in error-correction form for West Germany. The econometric results provide support for the hypothesis that cyclical shocks to the demand for labor and hysteresis played an important role in shaping labor market outcomes in Germany. Comment by Jürgen Jerger.