Transcript title author date place

Lessons from
German Labor Market Policy
Klaus F. Zimmermann
IZA, DIW Berlin and Bonn University
September 25, 2009
Chinese University of Hong Kong
Outline
1.
2.
3.
4.
5.
The German Labor Market: An Overview
Structural Deficits before 2003
Major Labor Market Reforms (2003-2005, “Hartz Reforms”)
ALMP: The German Experience
Conclusions: The Design of Labor Market Policy
2
The German Labor Market: An Overview
• High unemployment as a central problem
in post-unification Germany
• This has often been linked to:
– The high level of employment protection
– The high labor costs
– The strictly regulated labor market
• Protection of employment risks characterized by:
– High level of statutory employment protection for regular contracts
– Predominance of compulsory social insurance providing
earnings-related benefits in case of unemployment
after a sufficient contribution period
– Until 2005 also earnings-related long-term unemployment assistance
– Replaced by a means-tested flat rate benefit in 2005:
Major break with Germany‘s long tradition of status maintenance
in case of unemployment
► Part of a broader policy shift towards activation (“Hartz reforms”)
3
Unemployment in Germany (1960-2009)
Dotcom bubble
5,500
5,000
4,500
Reunited Germany*
West Germany
East Germany
Hartz reforms
German
reunification
in thousands
4,000
3,462,446
3,500
Oil crises
3,000
2,368,217
2,500
Post-war
2,000 economic boom
1,500
1,094,229
1,000
500
0
1960
Source: Federal Employment Agency
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
► In October 2008 the unemployment dropped under the level of 3 million for the first time since 1992
► This might be an indication that the fundamental structural problems of the German labor market
could have been decisively loosen by the Hartz reforms
4
Policy Responses to the German Reunification
• After the German reunification, the integration of the East German
economy led to an increase in unemployment
• The political decision to finance a large share of the transition costs
through social insurance contributions (and not by general taxation)
increased the burden on labor costs
• Policymakers reacted in a selective way:
– Higher non-wage labor costs put pressure on standard forms of
employment and dampened new employment opportunities
– Growth of flexible jobs, i.e., non-standard forms of employment,
facilitated by several legislative steps that required less employment
regulation, involved lower or no non-wage labor costs, or offered even
subsidies for such employment forms
• Additionally, active labor market policy (ALMP) measures were
extensively used in East Germany
– In particular, public training programs and job creation schemes
5
Post-Unification Germany: Development of
Standard vs. Non-Standard Forms of Employment
mini-jobs (incl. side jobs)
regular employment
29.0
7.0
28.5
6.5
28.0
6.0
27.5
5.5
27.0
5.0
26.5
4.5
26.0
4.0
25.5
in millions
mini-jobs (exclusive)
Source: Federal Employment Agency
25.0
ar
-9
Se 9
p9
M 9
ar
-0
Se 0
p0
M 0
ar
-0
Se 1
p0
M 1
ar
-0
Se 2
p0
M 2
ar
-0
Se 3
p0
M 3
ar
-0
Se 4
p0
M 4
ar
-0
Se 5
p0
M 5
ar
-0
Se 6
p0
M 6
ar
-0
Se 7
p0
M 7
ar
-0
Se 8
p08
3.5
M
in millions
7.5
► Non-standard forms of employment gained importance in recent years
► Increase particularly strong in 2003 and 2004
6
Post-Unification Germany: Extensive Use of
Job Creation Schemes and Public Training Programs
Annual Number of Entrants into ALMP (2000-2006)
5,000,000
4,000,000
West Germany: total (left scale)
East Germany: total (left scale)
West Germany: job creation schemes (right scale)
East Germany: job creation schemes (right scale)
West Germany: training programs (right scale)
East Germany: training programs (right scale)
... but both „traditional“ ALMP
measures in Germany lost
importance in recent years
500,000
400,000
3,000,000
300,000
2,000,000
200,000
1,000,000
100,000
Source: Federal Employment Agency.
0
0
2000
2001
2002
2003
2004
2005
2006
7
Labor Market Institutions: Historical Perspective
• Compulsory unemployment insurance introduced in 1927
(complementing existing insurances for health, accident and old age)
• A generous benefit system emerged after World War II,
especially during the economic boom in the 1960s
• ALMP introduced when unemployment started to rise in the 1970s
– When unemployment was still low, measures were designed
to prevent rather than to combat unemployment
– After German reunification, ALMP played a central role in alleviating the
social consequences of the breakdown of the economy in East Germany
– For instance, in 1992 the number of individuals participating
in job creation schemes or training programs exceeded the number
of unemployed (in East Germany)
8
Labor Market Institutions: Set-Up during the 1990s
• Unemployment benefits (UB) meant to maintain the worker‘s social
status during unemployment rather than providing a safety net as a
last resort
– Duration: 6 to 32 months
(depending on previous employment duration and age)
– Amount: 67 percent of last net income; maximum: 4,250 € per month
(60 percent without children)
– Financing: unemployment insurance contributions (employers/employees)
• Unemployment assistance (UA) paid after UB entitlement period
had expired
– Duration: without time limit (!)
– Amount: 57 percent of last net income
(53 percent without children)
– Financing: taxes
• Social assistance (SA) as a possibility to supplement UB/UA
– Every household with an income below a certain threshold qualified for SA
9
Labor Market Institutions: The Need for Reforms (1/2)
Passive Labor Market Policy:
• Unlimited UB/UA payment duration extraordinary feature of the
German system
• Replacement rates for long-term unemployed were higher than
in any other OECD country (OECD, 2004)
• Replacement rates for short-time unemployed comparable to many
other OECD countries
• Incentives to take up a job were very low, especially for low-skilled:
– Generous benefit levels
– High benefit reduction rates
10
Labor Market Institutions: The Need for Reforms (2/2)
Active Labor Market Policy:
• High expenditure levels and long durations of programs
• Most important programs:
– Job creation schemes
– Training programs
• Job search assistance and monitoring was given low priority
• Sanctions were rarely implemented
• Assignment to programs based on the caseworkers‘ discretion
(no systematic individual profiling)
• No systematic evaluation
11
Major Labor Market Reforms (2003-2005)
“Hartz Reforms”
Implementation in four waves („Hartz I-IV“) between 2003 and 2005:
• Hartz I-III
– Stronger role of activation (e.g. sanctions)
– Significant reduction of long-term benefits
– Massive deregulation of fixed-term contracts,
agency work and marginal part-time
• Hartz IV
– Restructuring of the unemployment benefit and
social assistance schemes
– Means-tested flat-rate benefit replaced
earning-related long-term unemployment assistance
► Implementation of the reforms was tied to an evaluation mandate
12
Underlying Principles of the Reforms
core element:
principle of „rights and duties“
► improving employment services and policy measures
► activating the unemployed according to the principles
of „right and duties“
► stimulating employment demand by deregulating the labor market
Shift towards activation, effectiveness and efficiency
13
Threefold Reform Approach (1/3)
 Improving employment services and policy measures
 Re-designing of old measures and introduction of new measures of
ALMP
 Modernization of employment services along the lines of
New Public Management
• Results-based accountability of local employment offices
• Outsourcing of many offices
• Open competition between private service providers
Customer-orientated one-stop-centers, offering individual profiling,
job search assistance, social services and administration of benefit
payments
14
Threefold Reform Approach (2/3)
 Activating the unemployed according to the principle of „right and duties“
 Implementation of an activation strategy in various policy changes
• Priority to measures that support unemployed workers who are proactively seeking integration into regular employment
 Introduction of jobs exempt from any or with reduced social security
contributions to take up employment in low wage sector
• “Minijobs”/ “Midijobs”
 Restructuring of the benefit-system
• Reduction of unemployment benefit levels and durations
• Eligibility for subsistence allowances according to a person's ability to
work rather than according to previous contribution payments
• Possibility of benefit sanctions and reductions
15
Threefold Reform Approach (3/3)
 Stimulating employment demand by deregulating the labor market
 Deregulation of the temporary work sector
 Introduction of exemptions from restrictions on fixed-term contracts
and dismissal protection
16
Overall Reform Effects:
Evolution of the German Labor Force (1992-2007)
Inactive
100%
Decrease in the share of inactive individuals
25%
75%
50%
6%
5%
4%
7%
24%
25%
7%
8%
6%
4%
3%
8%
6%
Growth of
flexible jobs
21%
7%
7%
4%
3%
4%
2%
5%
3%
10%
11%
Unemployed
Unemployed
with job
Selfemployed
Marginal /
irregular
Agency work
Temporary
25%
45%
41%
40%
38%
Decrease in the share of permanent full-time employment
Vocational
education
Permanent
part-time
Permanent
full-time
0%
1992
1997
2002
2007
Source: SOEP
17
Growth of Flexible Jobs:
OECD EPL Index (1985-2008)
4
Continuous deregulation
of temporary contracts
3,5
3
2,5
2
1,5
1
0,5
Regular Contracts
Source: OECD
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
0
Temporary Contracts
18
ALMP: Lessons from the Mandatory Evaluation
Only a small part of the German ALMP effectively improves
individual reemployment probabilities:
1. Training programs
2. Start-up subsidies
3. Wage subsidies
4. Placement vouchers
... but further evaluation needed to assess long-term effects
► Reduced range of ALMP
► Focus on programs with proven positive effects
19
Lessons learned? ALMP Expenditures in Germany
have decreased by about one-third (2002-2006)
25.000
(in million €)
20,970
19,679
20.000
18,249
16,040
Expenditure increased:
► Start-up subsidies
Expenditure decreased:
► Training programs
► Job creation schemes
► Wage subsidies
14,978
15.000
Promotion of self-employment
Wage subsidies
Programs for disabled people
10.000
Youth programs
Training programs
5.000
Job search assistance
Job creation schemes etc.
Other measures
0
2002
2003
2004
2005
2006
Source:
Eichhorst and Zimmermann (2007)
20
Further Results of the Mandatory Evaluation
• Re-organization of public employment services mainly
successful – counseling and placement were intensified
in the course of the reforms – with the exception of
outsourcing of services
• Re-designing training programs seems to have improved
their effectiveness
• Significant positive effects of the redesigned wage subsidies
and start-up subsidies
• Job creation schemes continue to be detrimental for participants’
employment prospects
21
The Example of Training Programs:
Training Vouchers and Stricter Selection Criteria
Overall finding:
The effectiveness of training programs for the unemployed
has increased after the reforms
... but which features of the reforms have caused this increase –
and to what extent?
1. Introduction of training vouchers
Job seekers are free to select their training provider in the
market (previously this choice was made by the caseworker)
2. Stricter selection criteria
Stricter selection of the participants by the caseworkers
based on the expected reemployment probability
22
Decomposing the Reform Impact
on the Effectiveness of Training Programs
Voucher Effect
Selection Effect
Source: Rinne, Uhlendorff and Zhao (2008)
► Introduction of vouchers increased the effectiveness of
training programs in Germany
► Stricter selection does not improve effectiveness
23
Conclusions:
How to effectively design labor market policy?
• Two elements of passive labor market policy:
1. Maintaining the worker‘s social status during unemployment
(for a predetermined, finite period)
2. Providing a safety net as a last resort
• Systematic approach towards active labor market policy:
1. Evaluate the programs‘ effectiveness
2. Focus on programs with proven positive effects
• Activating the unemployed:
1. Principle of ‘rights and duties’
2. Efficient placement services
(but networks in general more efficient)
Flexibility AND Security
24
Klaus F. Zimmermann
IZA, DIW Berlin and Bonn University
IZA, P.O. Box 7240,
53072 Bonn, Germany
Phone: +49 (0) 228 - 38 94 0
Fax: +49 (0) 228 - 38 94 180
E-mail: [email protected]
www.iza.org