Structural Reform in Germany

60 Pages Posted: 9 Dec 2016

See all articles by Tom Krebs

Tom Krebs

University of Mannheim

Martin Scheffel

University of Cologne - Center for Macroeconomic Research (CMR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

Abstract

This paper provides a quantitative evaluation of the macroeconomic, distributional, and fiscal effects of three reform proposals for Germany: i) a reduction in the social security tax in the low-wage sector, ii) a publicly financed expansion of full-day child care and full-day schooling, and iii) the further deregulation of the professional services sector. The analysis is based on a macroeconomic model with physical capital, human capital, job search, and household heterogeneity. All three reforms have positive short-run and long-run effects on employment, wages, and output. The quantitative effects of the deregulation reform are relatively small due to the small size of professional services in Germany. Policy reforms i) and ii) have substantial macroeconomic effects and positive distributional consequences. Ten years after implementation, reforms i) and ii) taken together increase employment by 1.6 percent, potential output by 1.5 percent, real hourly pre-tax wages in the low-wage sector by 3 percent, and real hourly pre-tax wages of women with children by 2.7 percent. The two reforms create fiscal deficits in the short run, but they also generate substantial fiscal surpluses in the long-run. They are fiscally efficient in the sense that the present value of short-term fiscal deficits and long-term surpluses is positive for any interest (discount) rate less than 9 percent.

Keywords: Fiscal reforms, Germany, Payroll and social security taxes, Tax reforms, Primary education, Services sector, Econometric models, Structural reform, macroeconomic model, Germany, labor tax, professional services, child care,schooling

JEL Classification: E24, E60, J20, J30

Suggested Citation

Krebs, Tom and Scheffel, Martin, Structural Reform in Germany (April 2016). IMF Working Paper No. 16/96, Available at SSRN: https://ssrn.com/abstract=2882692

Tom Krebs (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Martin Scheffel

University of Cologne - Center for Macroeconomic Research (CMR) ( email )

Cologne
Germany

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