Summary:
– In the early 2000s, the German economy appeared to be stagnating and unemployment remained high, meaning that the labor market needed to be reformed in order to break the deadlock.
– The Hartz Laws were introduced to provide a general framework conducive to reducing unemployment by improving both the supply and demand conditions for jobs.
– The results were very positive, and these reforms led to a recovery in employment and a decline in unemployment.
– However, these reforms have greatly contributed to an increase in the risk of poverty in Germany, casting doubt on the German model.
The unemployment rate in France has just broken a sad record in recent days, affecting nearly 11% of the working population. The overall situation in the eurozone is hardly more encouraging, with an average unemployment rate of 12.1% in April 2013. A few countries are bucking this worrying trend, notably the Netherlands and Austria, but also Germany.
Moribund in the early 2000s, the « sick man » of the Eurozone, as it was nicknamed, has recovered and is currently (once again!) a model student in terms of employment, with an unemployment rate of 5.4% in May 2013. The strength of the German labor market is largely due to the major reforms undertaken since 2002. Despite impressive results, especially in times of crisis, the « German model » does not present an exclusively favorable picture, particularly in terms of social risk.
Early 2000s: a gloomy economic and social context calling for reforms
In the early 2000s, the German economy seemed to be running out of steam and slowing down: the cost of reunification had not yet been fully absorbed, productivity was sluggish due to the difficult integration of Ossies (former citizens of the German Democratic Republic before reunification) into the labor market, unemployment was rising, and growth was very weak compared to other countries in the Eurozone (0% growth in 2002). At the same time, Germany is facing a delicate demographic situation, with a low fertility rate and an aging population.
Its labor force participation rate, representing the proportion of the working-age population in employment, stagnated significantly between 1992 and 2002, losing its lead over the other members of the Eurozone, which are gradually catching up with and even overtaking Germany. Between 1999 and 2002, the unemployment rate hovered around 8.25%, while it continued to fall on average in the eurozone. Women and seniors are particularly affected by this phenomenon. Long-term unemployment (the proportion of the working population unemployed for at least one year) was also above the Eurozone average (4.05% compared to 3.75%) in the early 2000s, one of the worst results alongside countries such as Greece and Spain. The social context at the time was deteriorating, with the German social model being strongly questioned, particularly by the less affluent section of the population, who felt that social mobility no longer worked.
To combat rising unemployment, the government of G. Schröder, Chancellor at the time, decided to implement an ambitious labor market reform policy starting in March 2002. The main objective was to provide incentives for those most affected by unemployment to return to the labor market. These reforms were part of « Agenda 2010, » which aimed to make the labor market more flexible while targeting an unemployment rate close to full employment (4-5%, depending on definitions and estimates). These reforms are better known as the Hartz Laws.
The four Hartz Laws
The Hartz Commission was tasked with providing solutions to facilitate the integration of job seekers into the labor market. At the same time, it had to find incentives for these same job seekers to speed up their return to work. It therefore had a dual objective of stimulating both labor supply and demand. This resulted in four laws, which were successively implemented despite their chronic unpopularity and opposition from the SPD-Grüne coalition [1].
The Hartz reforms are therefore based on the following four pillars:
Hartz I: introduced in January 2003, it was intended to:
– Create temporary employment agencies, known as Personal Service Agenturen, offering training to job seekers to prevent their downgrading.
– Ease the conditions for temporary work (by no longer limiting the maximum duration of assignments for this type of work and aligning salary conditions with those of permanent employees).
– Require job seekers to provide proof, in the event of refusal of a job offer, to validate their entitlement to unemployment benefits.
Hartz II: from April 2003, self-employment for the unemployed was made easier, as was the creation of businesses (or mini-jobs, which we will come back to later), through the introduction of a system of public financial aid and support.
Hartz III: from January 2004, the powers of the public employment service were partially transferred to local authorities, which therefore benefited from greater autonomy in supervising job seekers, with conditions varying from one federal state to another depending on the labor market situation. The requirements for access to unemployment insurance benefits were tightened with:
– a longer minimum membership period (1 year out of the 2 years prior to registering as unemployed, compared with 1 year out of 3 years previously) in order to be eligible.
– a reduction in the maximum duration of contracts benefiting from public subsidies.
Hartz IV: the last and most controversial part of the reform was introduced in January 2005. It abolished unemployment assistance (benefits for unemployed people who had exhausted their entitlement) and made access to poverty reduction assistance schemes (providing a decent minimum income [2]) conditional on signing a contract with the employment agencies.
Mini-jobs and midi-jobs
As we have just seen, under Hartz II, mini-jobs became widespread in the German labor market in the mid-2000s (they already existed before, but their number has increased since the Hartz law). These are unique contracts, involving a small number of hours worked and a very modest salary, but the maximum amounts were increased under Hartz 2 from €325 per month to €450. Midi-jobs, on the other hand, meet other conditions and can pay up to €850 gross per month.
Mini-jobs have the advantage of being subject to minimal or even zero social security contributions. This means that employees do not necessarily contribute to their retirement pensions, but they do have the option of paying a reduced contribution of 4.9%, which entitles them to the same rights as those with more standard employment contracts. However, people on mini-job contracts are not eligible for unemployment benefits or health insurance [3], as employer contributions for mini-jobs do not cover health insurance. Even though the employer does not pay anything into health insurance, their contribution rate for mini-jobs is 28% compared to 20% for an employee with a standard contract, which may seem a little surprising given the growing number of mini-job contracts after 2005, as we will see later.
Midi-jobs, health insurance and pension rights, which are the same as for a normal employee, pay contributions proportional to their rate of pay, between €450 and €850. There is also a final type of contract that appeared under Hartz IV for the non-market sector: one-euro jobs. With this type of contract, a person can continue to receive unemployment insurance and also receive a supplement of between €1 and €2.50 per hour for public service work.
Massive return to the labor market and decline in unemployment: the victory of the Hartz reforms
The Hartz reforms have been quite successful: between 2002 and 2012, the working population increased by 6.7% despite a declining demographic, unemployment is around 5.4%, and the employment rate rose from 64.3% in 2004 to 72.8% in 2012 (proportion of the working-age population – 15 to 64 years old). According to estimates by the International Monetary Fund (IMF), it is seniors and women who have benefited most from this dramatic upturn.
This increase in activity has been made possible by the creation of numerous jobs, nearly 2.5 million since the introduction of the latest Hartz laws. Most of the jobs created are part-time (the famous Kurzarbeit), fixed-term contracts, and mini/midi-jobs .
Overall, mini/midi-jobs have only played a secondary role in the employment recovery:
– Admittedly , 2.5 million people had mini-jobs as a second job in 2011 , compared with 1.7 million in 2004;
– Midi-jobs increased only slightly (+15%, or 180,000 additional people between 2007 and 2011 alone, the majority of whom were women);
– Between 2004 and 2012, full-time employment did increase, but to a lesser extent (+2.4%) than part-time employment (+33%).
Several studies have sought to assess the direct impact of the Hartz reforms on reducing unemployment in Germany, to see whether structural unemployment has actually fallen and whether this decline is not just a temporary phenomenon. A March 2013 Treasury article compiled a bibliography and summarized the main findings on the subject:
– Incentives to return to the labor market have been effective.
– Employment subsidies have enabled the long-term unemployed to return to work more quickly.
– The average duration of long-term unemployment has decreased.
– Support for self-employment has contributed positively to the decline in unemployment benefit claims.
– There were fewer job losses than in the past.
– The only downside was that temporary employment agencies were abolished in 2006 due to their lack of effectiveness.
Overall, the reforms have had a positive impact on the labor market and have contributed significantly to the decline in structural unemployment. This is all the more evident as the Hartz I, II, and III laws continued to have positive effects with a certain time lag: during the recession that followed the financial crisis (a 5.1% contraction in German activity in 2009), unemployment rose slightly (+0.9%) between September 2008 and July 2009, before falling again quite rapidly (-2.5%) until May 2013.
Increased precariousness and social risk: the failure of the German model
Firstly, inequality in Germany has continued to increase throughout the 2000s, and labor market reforms have not curbed this upward trend. The Gini coefficient, which is an indicator used to measure income redistribution inequalities, provides a summary of how these inequalities have evolved in recent years. The closer it is to 1, the more a small proportion of the population accounts for the majority of income, the greater the inequalities, and the closer it is to 0, the more egalitarian the society is in terms of income distribution. In the case of Germany, the Gini coefficient, after taxes and social transfers, was 0.26 in the early 2000s, before rising to 0.28 in the mid-2000s and then to 0.29 at the end of that decade.
Secondly, the risk of poverty also increased during the 2000s. An individual is considered to be at risk of poverty when their income is less than or equal to 60% of the median current income of the population of the country in which they live. Two types of population were affected by this risk in Germany during the 2000s: the unemployed, who were quite severely affected, and, to a lesser extent, people in part-time employment. The poverty rate for the total population in Germany is equivalent to that of the Eurozone, but the case of the unemployed seems very worrying, even though it affects only a small part of the working population.
The Hartz reforms were partly responsible for this increase in precariousness. As we have seen previously, Hartz III and IV tightened the conditions for access, shortened the duration of unemployment benefit entitlement, and abolished certain forms of assistance. The main consequences of these reforms were as follows:
– The long-term unemployed who have not managed to re-enter the labor market have faced a significant drop in their income, and the new system works against them.
– In addition, some of those who have found work generally fall below the poverty line because their low number of working hours does not provide them with sufficient income. The proliferation of fixed-term contracts and mini/midi-jobs has also failed to increase real household income, which stagnated significantly in the 2000s, unlike in other member countries of the Organization for Economic Cooperation and Development (OECD).
– The reduction in the number of hours worked, combined with new rules limiting early retirement (these new rules were introduced independently of the Hartz Laws), has:
> Discouraged early retirement due to the aging population, which certainly helped to limit unemployment among 50-64 year olds, but did not prevent a decline in income for this population.
> Limited opportunities for permanent or full-time contracts for young workers, thereby increasing their vulnerability to the risk of poverty.
Conclusion
It is undeniable that the labor market reforms have fulfilled the objectives of « Agenda 2010 » to drastically reduce unemployment figures, which have never been so low since 1992. Many jobs have been created, and the greater flexibility introduced by the Hartz laws has helped to reduce the proportion of the workforce that is unemployed. However, the risk of poverty is rising sharply compared to some European neighbors, suggesting that the decline in unemployment has been made possible by an increase in the number of precarious jobs.
Notes:
[1] The SPD, or Sozialdemokratische Partei Deutchsland, Chancellor Schröder’s party, and the Grüne, the Green Party, which plays an important role in German political life.
[2] It should be noted that, unlike France, there is no minimum wage in Germany.
[3] This person does not have access to health insurance through their mini-job contract, but it is still possible to benefit from it if they are engaged in another activity, provided that it is not another mini-job type contract .
References:
F. Kramarz, A. Spitz-Oener, C. Senftleben, and H. Zwiener, « Les mutations du marché du travail allemand » (Changes in the German labor market), CAE Report No. 102, 2012.
T. Krebs and M. Scheffel, « Macroeconomic evaluation of labor market reform in Germany, « IMF Working Paper, 2013.
F. Bouvard, L. Rambert, L. Romanello, and N. Studer, « Hartz reforms: what effects on the German labor market?« , Trésor-Eco No. 110, March 2013.
