Unemployment insurance plays a crucial role in stabilizing economies and protecting workers from sudden income loss. Yet its effects extend beyond the labor market. A new study by Erik Dasenbrock and Britta Gehrke explores how changes in unemployment benefits can influence not only employment, but also real interest rates—and why these effects differ across age groups.
The authors ask how adjustments to unemployment benefits shape the wider economy once all feedback effects between labor markets and savings behavior are considered. While unemployment insurance is often analyzed for its direct effects on job search and wages, this paper highlights an additional channel: reforms can alter the saving and borrowing decisions of different generations, which in turn affect interest rates and aggregate output.
To investigate this, the study combines empirical analysis with theoretical modeling. It first uses German data from 2000 to 2019 in a structural vector autoregression (SVAR) that applies narrative sign restrictions to identify major exogenous policy changes, such as the Hartz reforms. It then develops an overlapping-generations model with job-search frictions and age-specific saving behavior to explain the empirical patterns.
The empirical results show that benefit cuts in Germany have been followed by persistent declines in unemployment and, over the medium term, a small but measurable fall in real interest rates (around 0.1 percentage points). The effects vary by age: unemployment among young workers (15–24) decreases roughly twice as much as among older workers (55 and above). This suggests that young job seekers, who are typically more flexible and responsive to hiring incentives, play a key role in transmitting benefit reforms to the wider economy.
The model helps explain the mechanisms behind these findings. Lower benefits reduce wage pressure, leading firms to create more vacancies. Young workers find jobs faster, increasing their income and allowing them to reduce borrowing. Aggregate savings rise, which lowers real interest rates and stimulates further investment and employment—a reinforcing cycle the authors describe as the real-interest-rate channel.
Quantitatively, a 1 percent reduction in unemployment benefits raises long-run output by about 0.4 percent—around ten times more than in conventional models that ignore life-cycle differences. Even when alternative financing methods, such as public debt, or physical capital are introduced, the direction and significance of the results remain.
Short-term and long-term responses differ. Immediately after a reform, lower benefits and wages can reduce income before new jobs appear, temporarily increasing interest rates. Over time, however, as employment rises and households save more, the real interest rate falls and output expands.
Overall, the study points to a broader implication: unemployment-benefit design affects not only individual incentives but also macroeconomic dynamics through saving behavior and interest-rate adjustment. Taking these general-equilibrium effects into account may help policymakers better assess the long-run consequences of benefit reforms for both employment and growth.
About the authors
Erik Dasenbrock
Economist at Freie Universität Berlin. His research focuses on macroeconomic policy, unemployment, and monetary transmission in heterogeneous-agent settings.
Britta Gehrke
Professor of macroeconomics at Freie Universität, further affiliated with IAB (Institute for Employment Research) Nuremberg and IZA - Institute of Labor Economics. Her research interest focuses on macroeconomics, labor markets and business cycles. Her projects investigate the role of policies such as fiscal policy or short-time work over the business cycle, structural reforms and the interaction of financial and labor markets. Her work has been published in international economic journals and is discussed in policy pieces. She is associate editor of the Journal for Labour Market Research, a member of the scientific advisory board of Wirtschaftsdienst and a member of the standing field committee "Macroeconomics" of the Verein für Socialpolitik (German Economic Association).
