Distributional consequences of labor demand adjustments to a downturn : a model-based approach with application to Germany 2008-09

Macro-level changes can have substantial effects on the distribution of resources
at the household level. While it is possible to speculate about which groups are likely
to be hardest-hit, detailed distributional studies are still largely backward-looking.
This paper suggests a straightforward approach to gauge the distributional and fiscal implications of large output changes at an early stage. We illustrate the method
with an evaluation of the impact of the 2008-2009 crisis in Germany. We take as a
starting point a very detailed administrative matched employer-employee dataset to
estimate labor demand and predict the effects of output shocks at a disaggregated
level. The predicted employment effects are then transposed to household-level
microdata, in order to analyze the incidence of rising unemployment and reduced
working hours on poverty and inequality. We focus on two alternative scenarios of
the labor demand adjustment process, one based on reductions in hours (intensive
margin) and close to the German experience, and the other assuming extensive
margin adjustments that take place through layoffs (close to the US situation). Our
results suggest that the distributional and fiscal consequences are less severe when
labor demand reacts along the intensive margin.