Germany has not only successfully managed to escape the unemployment trap it was caught in for a couple of decades, it also performed exceptionally well during and after the Great Recession. The country now appears to be the North Star of labor policy. In terms of long-term unemployment, for example, the current situation in Germany is very similar to the one in the United States. This is very surprising when considering that the two countries were at strikingly different starting points in the early 2000s. It is thus not surprising that the concepts underlying the “German model” are now viewed as a possible reference model for other countries with labor market turmoil.
A new IZA study by IZA Deputy Director of Research Ulf Rinne and IZA Director Klaus F. Zimmermann assesses the potential of the German success story as a model for effective, evidence-based policymaking. The specific combination of a flexible management of working time (through overtime, short-time work, working time accounts and labor hoarding), social cohesion and controlled unit labor costs, combined with a rigid, incentive-oriented labor policy supported by effective program evaluation, provide a set of guiding principles for labor market policies. Although one should resist the temptation of believing in a one-size-fits-all solution, other countries should closely investigate these features. In this context, however, austerity and spending cuts for their own sake were never the “German style,” as it is now widely, but falsely believed. Download the full discussion paper here. An earlier contribution specifically analyzing the German labor market during the Great Recession can be found here.