The Hartz Reforms
How did Germany try to reform its labor market in the early 2000's and what are the lingering effects today?
“Courage for Peace - Courage for Change”
The “Hartz Reforms” were a series of 4 labor market reforms from 2003 to 2004 as part of Chancellor Gerhard Schrödinger’s “Agenda 2010” plan to reform the German economy after over a decade of rising unemployment and economic stagnation. A catalyst to these reforms was the release of a study in early 2002 that the federal “Arbeitsämter” (job centers) were placing unemployed candidates into jobs not at the 50% placement rate they had been claiming, but a 17% rate1. The reforms, created by a committee under Volkswagen personnel executive Peter Hartz, included:
Restructuring of unemployment agencies and job centers
Expansion of “Mini-Jobs,” marginal employment to keep workers’ skills and qualifications up to date and reduce the demand for full unemployment benefits
Additional grants for entrepreneurs through the “Me Inc.” program
Reduced barriers to entry in “Handwerk” (craft and trade professions) including removal of licensing tiers and expanding apprenticeship and vocational training options
Trimmed unemployment benefits by moving the long term unemployed to lower social welfare benefits
Closed loopholes which allowed those nearing retirement to retire early on federal unemployment benefits
Made it easier for companies to dismiss workers by reducing the company’s unemployment insurance commitment for those employees
The Hartz reforms remain controversial today because they have in many ways been associated with stagnation in real wages, rising inequality2, and reduced stability in employment. Christian Odendahl, chief economist for the Center for European Reform, points out that much of the economic recovery coincides, not with the Hartz Reforms, but a perfect storm of international macroeconomic conditions hitting all at once in the mid-2000s3. For instance, clauses exempting certain jobs and workplaces from the collective bargaining agreements of national labor unions put labor unions on the back foot in negotiations with employers during the global trend of outsourcing which characterized the era. As Odendahl argues, “Unions negotiated agreements that preserved jobs rather than boosted wages.” Resulting in stagnation in real wages, but maintaining a strong industrial equipment sector which would be in high demand as that same trend of outsourcing invested in developing economies in Africa, Asia, and Eastern Europe4.
To dig further into an effect of the Hartz Reforms, let’s look at one of the stated goals of the program, reduction in unit labor cost, and the effect that had.
Unit Labor Cost and Competitiveness
Unit Labor Cost (ULC) is intended to measure and compare the overall price competitiveness and productivity per unit of output produced. The below graph shows that during and immediately after the period of reform (2003-2004), unit labor costs began to stabilize and fall.
Source: OECD (2022), Unit labour costs (indicator). doi: 10.1787/37d9d925-en (Accessed on 05 June 2022)
The reform and post reform era in Germany became characterized by declining job stability for many employees5. The expansion of Mini-Jobs and temp work (Kurzarbeit), cutting of unemployment benefits for rejecting offers of work (sometimes up to complete loss of benefits but since limited to 30% loss maximum6), and reduction in dismissal protection by the Hartz Reforms greatly exacerbated an already bad situation. As many critics of the reforms (including Odendahl) point out, declining job stability and the reforms’ effects on unemployment insurance and social welfare likely pushed many workers, especially unskilled and lower income workers, to take lower paying jobs rather than wait and search for better options.
The Problem with Real Wage Analysis in Germany
The stabilization and decline of unit labor costs in this period cannot wholly be attributed to declining wages however. It is true, that to some extent the lower unit labor cost and larger macroeconomic changes in countries which would become major buyers of German goods had a sizeable effect. But a key focus of the Hartz Reforms was unemployment insurance and social welfare. Beyond the reforms of Hartz IV moving the long term unemployed (>12 months) to social welfare rather than the higher unemployment insurance, expansion of Kurzarbeit, Mini-Jobs, and marginal employment created opportunities of federally subsidized part time employment. The result is “Mini-Jobbers” receiving the social transfers from the Federal Labor Agency heavily subsidizing their earnings. There is also much more nuance to Mini-Jobs; they are tax exempt below €450/month, they have a lower cost breakdown for employers in contribution to federal programs, and depending on the worker’s status (whether or not a Mini-Job is their primary employment or if they are married but not the main earner) there are a variety of different breakdowns for taxes and labor costs to employers. Theoretically, this explains the declining unit labor costs and real wages among lower earners, while household disposable income after social transfers increased in that time.
Source: OECD (2022), Household disposable income (indicator). doi: 10.1787/dd50eddd-en (Accessed on 05 June 2022)
Effects of Payroll Subsidies
Either through direct social transfers or as an implicit subsidy through tax exemptions, subsidized marginal employment such as Mini-Jobs does effectively reduce labor costs for employers but creates a fiscal constraint for the state. Unsubsidized labor contributes more to social programs, while subsidized marginal employment contributes less to public services while also being a draw on those same services. Germany found a limited way around this during the Hartz Reforms by raising taxes on energy, particularly its lucrative coal industry. Furthermore, the cost savings that make marginal employment more cost effective for employers, really only benefits them in the case of lower income jobs requiring less training or worker experience7. For more technical and experienced positions, the revenue potential generated by these employees far outweighs the relatively small labor cost savings. The result, as previously stated, is that low income jobs become less secure, employers lose incentives to invest in the development of their workforce, career earning potential of “Mini-Jobbers” declines, and inequality continues to worsen.
Conclusion
The Hartz Reforms continue to remain controversial today, because even though they mostly achieved their stated goals (to reform the Federal Job Centers, lower labor cost, and rework unemployment insurance and social welfare), it came at a tremendous human cost. One in five German in the workforce are now primarily works low paying, insecure jobs8. This has already had a tremendous impact on inequality, wealth generation for younger generations, and even the financial stability of the European economy as a whole:
“Lower consumption, higher savings and lower investment in Germany also led to the export of capital, which was then invested in other parts of Europe and the world – sometimes in unsustainable consumption and property booms. German wage restraint thus contributed to unsustainable growth, inflation and the build-up of debt elsewhere; those factors in turn threatened the stability of the eurozone a few years down the line.” - Christian Odendahl, The Hartz Myth, 2017
Germany had the benefit of timing and the circumstances of the early 2000’s to spark recovery when the Hartz Reforms . However, the reforms also put forward a number of key policy ideas that countries like the United States could learn from.
Marginal employment is a possible solution to preserve human capital and maintain the connection of workers to their industry. A key issue the United States has faced in each of its last recessions has been lost workers. Skilled employees with valuable experience and knowledge disappeared into other industries or early retirement because their foothold in the industry, licensing, or network disappeared. Marginal employment, with checks on abuse by employers, seems to be an effective option and increased applications for such programs could be seen as an early indicator.
A positive effect of marginal employment was reduction in non-wage labor costs for employers, promoting the retention of many jobs that were at high risk of being outsourced. However, this should be seen as a part of a greater movement to secure low wage jobs with a high risk of outsourcing or automation. Without a strong public safety net, this undercuts the security of employment for many workers. Furthermore, the benefit which Germany saw in the post reform recovery was from the hard work of trade unions who negotiated the preservation of jobs seen as key to long term economic potential (heavy manufacturing, industrial equipment, etc.).
Germany’s experience with the Hartz Reforms reinforces the need to balance economic policy with its human costs. The competitiveness achieved by the German economy came at a tremendous cost for lower income Germans. Though far from a perfect economic policy, the Hartz Reforms did utilize a number of policy options to be added to the toolbelts of other countries with some modifications.
This article is my first attempt to improve at my technical writing skill. I would greatly appreciate any feedback you may have so I can begin to apply it to future articles.
Thank you - Josh
William Boston. 02/15/2002. “Scandal Is Undermining Confidence In Germany's Job-Creation Efforts.” The Wall Street Journal. https://www.wsj.com/articles/SB1013716341880218520?reflink=desktopwebshare_permalink
And
02/24/2002. “Schröder Plans to Revamp Labour Office.” Deutsche Welle. https://www.dw.com/en/schr%C3%B6der-plans-to-revamp-labour-office/a-448171
Dustmann, Christian, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener. 2014. "From Sick Man of Europe to Economic Superstar: Germany's Resurgent Economy." Journal of Economic Perspectives, 28 (1): 167-88.
Odendahl, Christian. 2017. “The Hartz Myth: A closer look at Germany’s labour market reforms.” Policy Brief, Center for European Reform, https://www.cer.eu/sites/default/files/pbrief_german_labour_19.7.17.pdf
Stephan Danninger and Fred Joutz, ‘What explains Germany’s rebounding export market share?’, Working Paper, International Monetary Fund, 2007
Giannelli, G.C., Jaenichen, U. & Rothe, T. The evolution of job stability and wages after the implementation of the Hartz reforms. J Labour Market Res 49, 269–294 (2016). https://doi.org/10.1007/s12651-016-0209-x
Rachel Loxton. 05/11/2019. “Hartz IV: German court slaps down harshest sanctions against jobseekers.” The Local de. https://www.thelocal.de/20191105/cutting-benefits-to-uncooperative-welfare-recipients-partially-illegal/
Collischon, M., Cygan-Rehm, K. & Riphahn, R.T. Employment effects of payroll tax subsidies. Small Bus Econ 57, 1201–1219 (2021). https://doi.org/10.1007/s11187-020-00344-w
Elizabeth Schumacher. 11/03/2018. “One in five working Germans is marginally employed.” Deutsche Welle. https://p.dw.com/p/37cKH