Transcript Slide 1

Lessons from Germany’s Hartz reforms
PD Dr. Hilmar Schneider
IZA, Bonn
Productivity and Economic Growth - The Role of the Labor Market
Magyar Nemzeti Bank and Hungarian Ministry of Finance,
Budapest, August 29, 2008
1/20
Germany’s unemployment is largely
caused by structural problems
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Over more than 30 years, unemployment rose in marked
steps in each recession without recovering in the subsequent
boom
This trend has been reversed during the recent upswing
Experts widely agree that this has to be ascribed to a large
extent to the labor market reform between 2003 and 2006
(the so-called Hartz reform)
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Development of unemployment in Germany:
5.500
Total
West Germany
East Germany
5.000
4.500
4.000
3.500
3.000
2.500
2.000
1.500
1.000
500
0
60
65
70
75
80
85
90
95
00
05
Source: Federal Labor Agency
3/20
How Germany tried to cope with
unemployment in the past
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Extension of maximum duration of unemployment
compensation to up to 32 months for elderly
(benefit level: 60-67% of previously earned net income)
Unlimited eligibility for unemployment aid (up to 57% of
previously earned net income, although means tested)
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)
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The consequences were:
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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 unions
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Development of unemployment risk
in Germany by skill groups:
60%
less than upper secondary education
upper secondary education
50%
tertiary education
total
40%
30%
20%
10%
0%
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005*
Source: IAB-Kurzbericht (18/2007); dotted lines are for Eastern Germany
6/20
Basic idea underlying the proposals
of the Hartz commision
Reducing unemployment by
reducing unemployment duration
It was asumed that a reduction of
unemployment duration would proportionally
reduce unemployment stock
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Main strategies:
► Improvement of placement activities
► Making transfer recipience less attractive,
especially with regard to de facto early
retirement
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Main elements of the labor market
reform in Germany (2003-2006):
2003:
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Creation of publicly sponsored temporal work agencies (PSA)
Introduction of training vouchers
Deduction of training periods from remaining eligibility for
unempoyment support
Increasing rules for reasonableness of job offers for recipients of
unemployment aid
Wage subsidies for elderly
Alleviation of temporary employment for workers above 51
Promotion of self-employment (Ich AG)
Promotion of so-called minijobs (400 €, also for secondary job)
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Main elements of the labor market
reform in Germany (2003-2006):
2004:
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Cut of wage subsidies for workers with placement difficulties (EGZ)
Public employment programs do no longer lead to a
renewed eligibility for unemployment compensation
Reduction of transfer programs from 24 to 12 months
Increasing the requirements of own initiatives of job seekers
Cutting back the monetary incentives for early retirement (part
time work for elderly)
10/20
Main elements of the labor market
reform in Germany (2003-2006):
2005:
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Increasing the conditions for promotion of self employment (Ich
AG)
Reduction of unemployment aid to the level of welfare
payments
Separation of competences: Federal Labor Agency covers only
those job seekers covered by unemployment insurance; other job
seekers have to address to their local municipality or the local
consortium of municipality and local labor agency
Introduction of a fee for the Federal Labor Agency for each jobseeker who runs out of insurance claims and raises claims for
unemployment aid (10.000 €)
11/20
Main elements of the labor market
reform in Germany (2003-2006):
2006:
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Reduction of maximum duration of unemployment support for
elderly from 32 to 18 months
Reduction of maximum duration of unemployment support for
other job seekers to 12 months
Abolishment of Ich AG
12/20
Visible effects of the reform
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Average unemployment duration fell from 270 days in 2005
to 170 days in 2008
Improvement of the effectiveness of active labor market policy
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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derprobability between
employment
difference of Differenz
Beschäftigungswahrscheinlichkeit
particitpants and non-participants
Example: Effectiveness of training programs
0,8
0,6
0,4
Start of training
program before
01.01.2003
0,2
0,0
Start of training
program after
01.01.2003
-0,2
-0,4
-0,6
-0,8
0
6
12
18
24
30
36
42
48
Monate
Programmeintritt
monthseit
since
program entry
Source: Schneider et al. (2006)
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Example: Reform effect of training programs
Differenz der
difference of employment probability
Beschäftigungswahrscheinlichkeit
0.8
0.6
0.4
difference of differences of
employment probabilities of
participants and nonparticipants before and after
the reform
0.2
0.0
-0.2
-0.4
-0.6
-0.8
0
6
12
18
24
30
36
42
48
Monate
Programmeintritt
monthseit
since
program entry
Source: Schneider et al. (2006)
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Employment rates of the elderly
80%
70%
J
USA
UK
CND
60%
D
50%
40%
F
I
30%
20%
10%
2000
2001
Germany*
USA
2002
2003
UK
Japan
2004
Italy
France*
Source: OECD, Employment Outlook 2007
2005
2006
2007
Canada
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Development of acceptance wages
Male - East
150
100
100
D monthly salary in €
D monthly salary in €
Male - West
150
50
0
-50
-100
2001
2003
2005
-150
2002
2004
50
0
-50
-100
2001
2003
2005
-150
-200
-200
0
2
4
6
8
10
12
0
2
duration of unemployment (months)
4
100
100
D monthly salary in €
150
50
0
-50
-100
-150
8
10
12
10
12
Female - East
150
2001
2003
2005
6
duration of unem ploym ent (m onths)
Female - West
D monthly salary in €
2002
2004
2002
2004
50
0
-50
-100
2001
2003
2005
-150
-200
2002
2004
-200
0
2
4
6
8
10
duration of unem ploym ent (m onths)
Source: Schneider (2008)
12
0
2
4
6
8
duration of unem ploym ent (m onths)
17/20
Development of unemployment in Germany:
5.500
5.000
4.500
4.000
unemployed
3.500
unemployment support
3.000
welfare
2.500
program participation (SGB III)
2.000
1.500
1.000
500
0
Jan
03
Jul 03
Jan
04
Jul 04
Jan
05
Source: Federal Labor Agency
Jul 05
Jan
06
Jul 06
Jan
07
Jul 07
Jan
08
Jul 08
Jan
09
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Expenditures for unemployment support (ALG I)
and welfare (ALG II) in Germany (bill. of €):
Source: Federal Labor Agency
19/20
Labor market policy is growth policy
► Fiscal savings allowed for a halving the
contributions to unemployment insurance
► The labor market reform has implicitly
triggered a strong growth impulse
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