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Klaus F. Zimmermann

Director, Institute for the Study of Labor (IZA), BonnPresident, German Institute for Economic Research (DIW Berlin)

Professor of Economics, University of BonnHonorary Professor of Economics, Free University of Berlin

MilanFebruary 3, 2006

An Evaluation of the “Hartz Reforms” in Germany

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1. Slow growth and high unemployment in Germany

2. Failed policies of the past

3. Chronology of reform policy until 2005

4. Preliminary results of first extensive evaluation

5. New government – new policy? Outlook and perspectives

Outline

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1. Slow growth and high unemployment in Germany

2. Failed policies of the past

3. Chronology of reform policy until 2005

4. Preliminary results of first extensive evaluation

5. New government – new policy? Outlook and perspectives

Outline

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2004 and 2005: Forecasts by DIW Berlin

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

EU15

Deutschland

Numbers=Germany‘s rank among EU15

Cha

nges

in %

Real GDP growth in D and EU15:Particularly slow growth in Germany

1314131415 141415 12 1211 13

Source: Eurostat, DIW Berlin

Germany

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Unemployment in international comparison:Germany’s performance is cause for concern

0

5

10

15

20

A B DK FIN F D IRL I J NL N P E S CH GB USA

Une

mpl

oym

ent r

ate

in %

1993 2004

Source: OECD

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Development of unemployment in Germany

Source: Federal Labor Agency

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

reunited GermanyWestern GermanyEastern Germany

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

reunited GermanyWestern GermanyEastern Germany

CDU/CSUKohl

SPD/GrüneSchröder

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0

2

4

6

8

10

12

14

16

18

20

S CH IRL J GB DK A USA B FIN E F D

Un

emp

loym

ent r

ate

(UR

) in

%

UR for Haupschule/Realschule graduates and school dropoutsUR for Gymnasium graduates (university entry requirement) UR for college/university graduates

Unemployment in Germany:Largely a problem of the low-skilled

Source: OECD

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-5

-4

-3

-2

-1

0

1

2

I E B F IRL USA S FIN GB CH A J DK D

Un

emp

loym

enn

t ra

te a

mo

ng

55

to 6

4-ye

ar-o

lds

min

us

tota

l un

emp

loym

ent

rate

Unemployment in Germany:Older workers disproportionately affected

Source: OECD

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0

10

20

30

40

50

60

70

80

N USA S GB DK FIN A NL CH J IRL E F P B I D

Long

-ter

m u

nem

ploy

ed a

s sh

are

of to

tal u

nem

ploy

ed

19902004

Long-term unemployment:No trend reversal in Germany

Source: OECD

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1. Slow growth and high unemployment in Germany

2. Failed policies of the past

3. Chronology of reform policy until 2005

4. Preliminary results of first extensive evaluation

5. New government – new policy? Outlook and perspectives

Outline

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How has Germany tried to cope with unemployment in the past?

• Extension of maximum duration of unemployment compensation to up to 32 months for elderly(benefit level: 60-67% of previously earned net income)

• Introduction of generous early retirement programs• Introduction of so-called transfer companies (prolongation

of maximum duration of unemployment compensation by another 24 months)

• Public employment programs that led to renewed eligibility for unemployment compensation (especially in Eastern Germany)

• Unlimited eligibility for unemployment aid (up to 57% of previously earned net income, but means tested)

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Fatal consequences …

• Rising implicit minimum wages• High unemployment rates of the elderly• High unemployment rates of low-skilled workers• High long-term unemployment rate• Rising labor cost due to a rise in social contributions

(especially with regard to financing a large part of reunification cost via social insurance)

• Strong bargaining position of the unionsGermany’s unemployment problems are caused by structural problemsA boom of the business cycle will not at all be sufficient to fight high unemployment figures

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1. Slow growth and high unemployment in Germany

2. Failed policies of the past

3. Chronology of reform policy until 2005

4. Preliminary results of first extensive evaluation

5. New government – new policy? Outlook and perspectives

Outline

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• February 2002: Establishment of the Commission “Modern Labor Market Services“Members: business executives, unions, crafts associations, politicians, scientists (no economists!) = “Hartz Commission“

• August 2002: Presentation of findings and implementation decision by federal government

• Implementation in four acts

• 1st and 2nd act – Jan. 2003 (“Hartz I + II”)

• 3rd act – Jan. 2004 (“Hartz III”)

• 4th act – Jan. 2005 (“Hartz IV”)

• Extensive scientific evaluation of labor market policies incl. provision of individual data; final report in fall 2006, preliminary report is available

• Comparable European evaluation efforts only in Sweden and Switzerland

Chronology of reforms

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• Early registration mandated even for impending unemployment• Stricter rules for taking up “reasonable” employment

(e.g. relocation without family ties now considered reasonable)• Benefit reduction: In cases of rejected job offers, burden of

proof now with the job seeker, not the job center• Reorientation of further training: Training vouchers,

certification of training service providers etc. • Programs targeted at the elderly: (e.g. firms who hire workers

above age 55 need not contribute to unemployment insurance; longer temporary contracts allowed)

• Personal Service Agencies (PSA) as a “vitalizing” element in job placement

Hartz I – start of reform (2003)

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• Unemployment offices turned into job centersGoal: new self-conception as a common point of contact for both unemployed workers and social welfare recipients

• Introduction of the Ich-AG (“I Inc.”) start-up assistance

• “Mini jobs“ – changed additional earnings limits for transfer recipients

• Government sponsoring of household-related services; easy registration of household help, which is then insured

Hartz II – promotion of employment (2003)

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• Merging of job creation programs (ABM) and structural adjustment programs (SAM)

• Stronger focus of ABM on reintegration prospects of the unemployed

• Employment services restructured and renamed

• Short-time work transfers are paid to employers during corporate restructuring programs (evaluation by DIW/IZA)

• Uniform entitlement to unemployment assistance (previous six-month special entitlement for draftees/conscientious objectors and seasonal workers abolished; ABM participation no longer creates additional entitlement)

Hartz III – minor changes (2004)

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• Merging of long-term unemployment assistance with social welfare transfers – inclusion of fit-to-work individuals previously not registered as unemployed

• Provision of public utility jobs for fit-to-work transfer recipients (“One-Euro Jobs”)

• Further tightening of “reasonableness” clause (sub-union wages and “standard regional wages” must now be accepted); otherwise transfers may be cut; reintegration contracts

• Introduction of “entry assistance” as a financial incentive to take up employment

Hartz IV – key reform of the labor market (2005)

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1. Slow growth and high unemployment in Germany

2. Failed policies of the past

3. Chronology of reform policy until 2005

4. Preliminary results of first extensive evaluation

5. New government – new policy? Outlook and perspectives

Outline

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Evaluation results I:Reform of job placement byfederal agency and communities

+ reform of organizational structure shows initial success; restructuring of Federal Labor Agency (BA) launched

+ BA starts to shift focus from social policy to labor policy: decisions no longer based on social needs alone, but increasingly on labor market prospects

– however: reform stalled halfway, still conflicting interests of BA and communities over allocation of problem groups

– organizational problems: customer satisfaction with BA services not yet improved

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Evaluation results II:Reorientation of labor policy instruments

+ INTEGRATION ASSISTANCE:

• one of the most important instruments

• used more efficiently than in the past

• positive effect on job prospects found

– JOB CREATION PROGRAMS:

• previous negative assessments confirmed

• detrimental effect on reintegration prospects

• abolishment called for

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Evaluation results III:Reorientation of labor policy instruments

+ FURTHER OCCUPATIONAL TRAINING

• findings of IZA long-term evaluation remarkably positive

• other studies refuted: short-term assessment yields negative results but fail to account for the measurable long-term catch-up process of participants

• reform has led to substantial efficiency gains: “lock-in” effect decreasing

• medium-term integration success can be improved by continuing reforms

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Evaluation results IV:Reorientation of labor policy instruments

+ / – START-UP ASSISTANCE (“I INC.”):

• positive assessment mainly attributable to free-riding effects

• share of short-term unemployed in the evaluation about 50% (in this group start-up success is likely without financial assistance)

• modification of this instrument necessary in order to support only “true” business start-ups

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Evaluation results V:Reorientation of labor policy instruments

– / + JOB PLACEMENT VOUCHERS:

• basically positive assessment of concept: free choice of placement service provider through vouchers issued to the unemployed

• however: so far no measurable improvement of integration prospects, same unemployment duration without voucher (competing study finds opposite result)

• no activation effect found (only 10% of vouchers used)• information on providers’ competence still lacking

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Evaluation results VI:Reorientation of labor policy instruments

+ / – COMMISSIONING THIRD PARTIES WITHINTEGRATION PROGRAMS:

• conflicting evaluation results: on the one hand evidence of failure of this instrument (reason: Federal Labor Agency tends to shift bad risks to external service providers)

• on the other hand evidence of earlier labor market integration as a result of these programs

• in any case, innovation competition between providers must be enhanced

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Evaluation results VII:Reorientation of labor policy instruments

– PERSONAL SERVICE AGENCIES:

• “flagship” of labor market reform turns into disaster despite wide availability of this offer

• number of PSA employees far below expectations• contrary to temp agencies, prospects of turning job into

permanent employment are weak• absorbability of firms in this segment apparently lower than

expected• evaluation shows that PSAs have worsened integration

prospects of unemployed• reasons still unclear: “bad risks”, union-wage requirement,

slow economic growth?

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Assessment of the evaluation results

• As could be expected, evaluation results are ambiguous: no “breakthrough” yet, but visible progress

• Despite criticism, long-term effects of Hartz reforms should not be underestimated: first courageous reform approach after years of political idleness

• Note: current results of evaluation are only preliminary

• Many programs are too “young” for a reliable judgment

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1. Slow growth and high unemployment in Germany

2. Failed policies of the past

3. Chronology of reform policy until 2005

4. Preliminary results of first extensive evaluation

5. New government – new policy? Outlook and perspectives

Outline

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Substantials of the labor market reform to stay

• Reduction of maximum duration of unemployment compensation to 18 months for elderly

• Reduction of transfer measures to 12 months• Public employment programs do no longer lead to a

renewed eligibility for unemployment compensation• Unemployment aid has been cut down to the level of

welfare payments• Work requirement for recipients of unemployment aid• Elimination of rules for reasonableness of job offers for

recipients of unemployment aid

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Potential impact of the reform on the long run

• Decline of implicit minimum wages• Higher integration rates for older workers• Higher integration rates for low-skilled workers• Decline of long-term unemployment rate• Decline of labor cost, since transfer recipients turn into tax

payers and payers of social contributions• Weakening of the bargaining power of the unions

(Siemens, Daimler-Chrysler, General Motors)

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Policy proposals of the Grand Coalition

• budget consolidation primary objective• subsidy reduction (not consistent enough)• VAT increase in 2007 to compensate e.g. for reduced

contributions to unemployment insurance• corporate tax reform in 2007• debate on “combination wage” rehashed (useless)• layoff protection: probation period extended to 2 years

maximum, but no fundamental reform (severance pay)• decision to raise retirement age to 67 over medium term• health reform postponed• overall concept not yet convincing

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What else must be done?

• promote courageous and efficiency-oriented restructuring of job placement, reduce bureaucracy

• implement workfare to improve incentives to take up work (social transfers require reciprocity in the form of public utility tasks; stronger motivation to seek regular employment)

• firm-level agreements should supersede union agreements• no overregulation through minimum wages• expansion of low-wage sector through service agencies and

deregulation of the welfare sector

• meet shortage of high-skilled labor and demographic change with well-targeted immigration rules

• reform of federalism as the “mother of all reforms”

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Deutschland – was nun?Economists present reform concepts

Published in 2006with contributions to:

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