Abstract
Germany’s recovery from an unemployment disease and its resilience to the Great Recession is remarkable. Its success story makes it a showcase for labor policy and labor market reforms. This paper assesses the potential of the German experience as a model for effective, evidence-based policymaking. Flexible management of working time (through overtime and short-time work, time accounts, and labor hoarding), social cohesion and controlled unit labor costs, combined with a rigid, incentive-oriented labor policy supported by effective program evaluation, define the characteristics of a strong reference model. Austerity, sometimes seen as core to the German model, is not viewed as a key element.
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Notes
For example, there were a number of changes in 1996 when, among other things, the maximum duration of fixed-term contracts was raised to 24 months and the size threshold relevant for the application of dismissal protection was raised from 5 to 10 employees. See Eichhorst and Marx (2011) for more details on labor market reforms during the 1990s.
These factors are not too different from those that were identified as the underlying causes of high unemployment in Europe: “labor market rigidities” (Nickell, 1997; Siebert, 1997).
The situation was exploding since mainly workers financed the costs of German reunification through nonwage labor costs (see Riphahn, Snower, and Zimmermann, 2001). As a consequence, labor demand was falling.
Siebert (1997, p. 40) highlights that a whole set of measures raised the reservation wage in the late 1960s and 1970s. Subsequent reforms did not change this situation markedly.
The reforms began with the historical speech of Gerhard Schröder (“Mut zum Frieden und Mut zur Veränderung”) on March 14, 2003 which led to heated societal debates. They split the Social Democratic Party; and even nowadays, no major political party in Germany wants to openly identify itself with the labor market reforms—also not the currently ruling conservative party. To the contrary, there are repeated attempts to re-reform the measures which are unpopular and considered to be unsocial by large parts of the population. Note that during the time of the reform debate, IZA initiated a public declaration in support of the reforms by 300 economists (IZA, 2003). A comprehensive reform agenda is outlined in Zimmermann (2003).
More precisely, the Federal Employment Agency was accused of massive fraud in their statistics about successful job placements in early 2002.
See, for example, the introductory chapter of Layard and Nickell (2011, pp. 4–5) by the editors discussing how analytical work shaped similar welfare-to-work approaches in several European countries—among others, the influential work by Richard Layard and Stephen J. Nickell.
About half of the early retirements before the reforms can be considered as “involuntary” (Dorn and Sousa-Poza, 2010). This is consistent with the observation that at least some firms used early retirement schemes as a means to circumvent strict employment protection legislation (Schmähl, 2003).
Caliendo, Snower, and Zimmermann (2008) document the ineffectiveness of job creation schemes in Germany. Although a different type of public work program was introduced at the same time (the so-called one-euro-jobs workfare scheme), this new program has different goals and effects (Hohmeyer and Wolff, 2012). At least the intention was to create a program in the spirit of workfare programs that had been first introduced in the United States. See Schneider, Uhlendorff, and Zimmermann (2013) for more details on the background and history of workfare programs as well as the effects of a pilot workfare project in Berlin.
See Caliendo and Hogenacker (2012, Table 1) for an overview about changes in the maximum duration of (insurance-based) unemployment benefits. For former recipients of unemployment assistance, the transfer payments decreased with the new means-tested long-term unemployment benefits, whereas for those having received social assistance before, they actually received marginally higher transfer payments (Konle-Seidl, Eichhorst, and Grienberger-Zingerle, 2010).
For example, sanctions were more frequently applied resulting in a sanction rate of about 4–5 percent after the reforms (Boockmann, Thomsen, and Walter, 2009).
As a comparison, Fuchs, Söhnlein, and Weber (2011) project the German labor force to shrink by almost 7 million workers by 2025.
Alber and Heisig (2011) distinguish between six forms of nonstandard employment: part-time workers, workers with fixed terms contracts, temporary agency workers, marginal employment (that is, workers in so-called “mini jobs”), workers who are welfare recipients at the same time, and workers in ALMP jobs (“one-euro-jobs”). The low-wage sector includes jobs paying less than two-thirds of the median annual wage.
When investigating the short-term impacts of the labor market reforms on poverty rates in Germany, Haisken-DeNew and Schmidt (2009) find no evidence of increases in this regard. On the other hand, the effect of employment in reducing the probability and intensity of poverty also remained unchanged by the reforms, at least in the short run.
As discussed above, rising establishment heterogeneity appears to be related to newer establishments that exhibit lower collective bargaining coverage (Card, Heining, and Kline, 2013).
As discussed above, these developments were accompanied by increasing wage inequality and an increasing share of nonstandard and low-wage employment.
Germany’s industrial structure may play a role in this regard as manufacturing continues to be a key factor in the country’s economic performance. It still accounted for about 23 percent of gross value added in Germany in 2008, while this share was considerable lower in the United States (13.3 percent) or the United Kingdom (12.3 percent; FMET, 2010). In addition, the German model has long been characterized by “flexible specialization” and “diversified quality production” (that is, already during the 1980s; Vitols, 2004).
Note that the German banking system suffered from high losses. As of July 2009, German write-downs accounted for 9 percent of global write-downs (Hardie and Howarth, 2009). Affected Germans banks have been repeatedly supported by interventions from the German government during the financial crisis to moderate consequences for the German economy (Zimmermann and Schäfer, 2010). In addition, the turmoil on international financial markets likely affected German firms to a smaller extent than firms in other countries. Although larger firms have increasingly moved away from Germany’s bank-based financial system providing capital to firms, this system is still important for small- and medium-sized firms.
Note that firms had in addition increasingly introduced more flexible labor arrangements during the previous boom, as discussed above.
Annual working hours decreased by 3.1 percent in 2009, corresponding to roughly 1.2 million jobs that could potentially be saved due to reduced working hours (Zapf and Bremer, 2010).
See Caliendo and Hogenacker (2012, Table 1) for an overview about the maximum entitlement durations before and after the reforms. These durations depend on previous employment and age. Although they were generally reduced after the reforms, unemployed individuals older than 58 years can still be entitled to receive benefits for up to 24 months.
Note that a certain degree of caution seems appropriate when directly comparing these Beveridge curves for Germany and the United States. As there is no vacancy survey in Germany, job openings rates and long-term unemployment rates are based on administrative data. This may lead to some bias, but the shape of the curve and its shifts should be a good indicator of underlying trends (Pissarides, 2013).
Lazear and Spletzer (2012) and Yellen (2013) support this view. However, Pissarides (2013, p. 403) argues that the structural labor market reforms in the United Kingdom and Germany avoided the structural problems of previous recessions, whereas the United States experience a slower recovery in terms of employment “most likely because of temporary structural problems introduced by the extension of unemployment insurance to nearly two years and the secular decline in labor mobility.”
Germany even broke the European Stability and Growth Pact in 2002 and 2003, together with France, by not observing the limits on government deficit (3 percent of GDP).
Note that the German government introduced two fiscal stimulus packages in 2009 and 2010. The proportion of tax cuts in these discretionary fiscal policy packages was high in international comparison (68 percent vs. 33 percent on average in the G20 countries; Verick and Islam, 2010).
See, for example, Streeck and Mertens (2010) who argue in favor of a common tendency toward regimes of austerity across a number of mature economies, including the United States and Germany. However, they use a rather peculiar definition of austerity that refers to a situation of a “continuous crisis of fiscal policy.”
It should be noted that labor market policies, especially PLMP, are usually nondiscretionary and thus act as automatic stabilizers. Hence, expenditures for PLMP are tied to the development of the unemployment rate and the active role of the government in cutting spending in this respect is limited.
Note that the unemployment shock was modest in Germany. Therefore, the actual role of unemployment benefits is presumably exaggerated in these simulations which assume the same shock for all countries.
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Additional information
*Ulf Rinne is Deputy Director of Research and Personal Advisor to the Director at the Institute for the Study of Labor (IZA) in Bonn. Klaus F. Zimmermann is Director of IZA and Professor of Economics at Bonn University. Zimmermann has advised Chancellor Gerhard Schröder and Economics and Labor Minister Wolfgang Clement at the time of the German labor market reforms on a personal (nonprofit) level. Both authors wish to thank Amelie F. Constant, Andreas Peichl, Stephan G. Richter, the Editor, and two anonymous referees for helpful comments and suggestions.