Benefits of German 2003 big bang are overstated

Germany started liberalising its labour market 10 years ago. That brought some welcome results, but the Hartz reforms’ impact on Germany’s economic resurgence tend to be overestimated. Wage restraint and a global demand boom for capital goods have been more important.

Ten years ago, then-German Chancellor Gerhard Schroeder outlined what appeared like a bold programme of labour market liberalisation. It included an overhaul of the way the German labour agency works and severe cuts in benefits for the long-term unemployed.

At the time, the country’s leading economists weren’t impressed. The reform proposals were regarded as too timid, a first step in the right direction – but a small one. Fast forward ten years. Today, the so-called “Hartz reforms” are hailed as the game changer that unleashed a new economic miracle in Europe’s largest economy and turned the labour market around.

The reality is somewhere in between. The reforms undoubtedly delivered some benefits. However, their actual impact on Germany’s strong employment performance is smaller than economists and politicians want the public to believe.

Germany’s recent labour market performance is impressive. Within the last ten years, the number of unemployed people in Germany declined by a third from 4.4 million to 2.9 million. Employment rose by 3.1 million people to an all-time record of 41.7 million.

Correlation, however, is not causality. Empirical studies find some beneficial effects for the long-term unemployed. The benefit cuts increased incentives to look for work, and the modernisation of the labour market reduced red tape. Benevolent trends overstate the total impact of the reforms. A slow but steady rise in the number of employed people had already started in 1994.

A long era of wage restraint, which started in the mid-nineties, restored the international competitiveness of German companies. In the ten years before the reforms, German unit labour costs remained steady while they rose almost 40 percent in the rest of the OECD. Meanwhile, China and other emerging markets fuelled the global demand for capital goods, a traditional strength of the German economy. During the recession of 2008 and 2009, temporary subsidies for employers who didn’t fire workers, as well as flexible working hours, helped avoid massive layoffs.

If Germany shows anything, it is that in the fight against unemployment, patience and a bit of luck matter at least as much as radical plans or programmes.

This article was initially  published as a Reuters Breakingviews comment on 14 March 2013.

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