The fall in German unemployment: A flow analysis

In this paper we investigate the recent fall in unemployment, and the rise in part-time work and labour market participation among prime-aged Germans. We show that unemployment fell because the Hartz reforms induced a large fraction of the long-term unemployed to deregister as jobseekers. However, labour force participation actually increased because many female non-participants accepted low-paid, part-time jobs. Counterfactual simulations using estimated transition probabilities show that observed changes in the stocks of registered and unregistered unemployment after 2002 essentially resulted from changes in their outflows. These changes are also the main determinants of the dynamics of the stocks of marginal, contributing part-time and full-time employment after 2002. Yet the full decrease in registered male unemployment cannot be explained by the reforms alone.