Trade Integration, Import Competition, and Optimal Unemployment Insurance

This paper investigates the optimal design and implementation of labor market institutions within an open economy framework. We develop a Heterogeneous Agent New Keynesian (HANK) DSGE model featuring search and matching frictions to analyze the interaction between labor market flexibility and international trade, with a specific focus on the German experience. Our findings suggest that labor market institutions, when analyzed in isolation, have a marginal impact on aggregate unemployment and welfare. However, their efficacy is significantly amplified when an economy is exposed to international trade.

We show that while import competition exerts upward pressure on unemployment in the short run, more flexible labor market institutions are essential for maximizing welfare in the long run. Crucially, we study the optimal policy sequence and find that a stepwise, sequential implementation of reforms is superior to a "big bang" approach. Such a trajectory maximizes aggregate welfare over a longer time horizon by effectively shielding heterogeneous agents from the regressive distributive effects of globalization shocks during the transition phase. Our results provide a normative rationale for gradualism in structural reform agendas within integrated economies.

Koautoren sind Andreas Hauptmann (IAB) und Benjamin Schwanebeck (FernUniversität in Hagen).

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