Application to Welfare Reform in Germany

Labour market reforms that are designed to stimulate labour supply at the lower end of the wage distribution can never be precisely restricted to a¤ect only the target group. Spillovers to and feedback from other segments of the labour market are unavoidable and may counteract the direct e¤ects of the re-form. An adequate representation of heterogeneous labour markets becomes therefore an important issue for the assessment of reforms. We analyse the possible interactions between labour market segments in a combined, consis-tent microsimulation-AGE model with a exible representation of substitution possibilities and di¤erent wage-forming regimes. We look at a stylised reform and nd labour-demand cross-price elasticities between the low and medium skilled to be the main drivers of the results. Interaction with the high-skilled segment is less pronounced. Keywords:Applied general equilibrium model, microsimulation, discrete work-ing time choice, heterogeneous labour markets, labour market refor