A decade ago the German labor market was regarded as a sick patient. Today it is performing exceptionally well and has been remarkably resilient to the financial and euro crisis. This must be attributed at least in part to the courageous “Agenda 2010” labor market reforms, which were introduced – against massive resistance – in March 2003. From the very beginning, IZA has constructively supported and scientifically evaluated this reform process. Today, ten years later, it has become obvious that the “Agenda 2010” project has left a lasting positive mark on the German labor market.
Let’s go back in time: On March 14, 2003, then German Chancellor Gerhard Schröder of the Social Democrats announced a series of concrete measures to reform the labor market, the social security system and public finances. A committee led by Peter Hartz (then board member for human resources at Volkswagen) worked out proposals to improve the public employment services and to design more efficient labor market policies. These were enacted in what came to be known as the “Hartz Laws I-IV”.
Key elements of the reform package were: (1) reform of active labor market policy instruments, (2) restrictions on welfare benefits for the unemployed, (3) modernization of the employment agencies, (4) stronger activation of the unemployed through the principle of “supporting and demanding” (Fördern und Fordern), (5) merging of unemployment aid and welfare benefits into basic income support for job seekers, (6) liberalization and expansion of flexible forms of employment such as temporary work, fixed-term contracts and small-scale employment (“mini jobs”).
A number of studies by IZA experts show that these measures have in many areas improved the functioning of the German employment system and the effectiveness of policy programs (IZA DP 2055, IZA DP 2605). As a result, the employment rate has risen substantially since the mid-2000s, particularly with many new jobs created in the service sector. This would not have been possible without a more flexible labor market and a consistent activation of the unemployed.
IZA has contributed its expertise in various ways: Beyond publicly supporting the reform process (e.g. by initiating calls of economists) and providing policy advice, IZA researchers have extensively studied the effectiveness of several reform components. In light of the predominantly positive results, IZA experts are highly critical of recent plans by policymakers to roll back some of the reforms.
Among the active labor market policy instruments analyzed by IZA were various measures to promote self-employment. In addition to the bridging allowance (Überbrückungsgeld) established in the mid-1980s, the Hartz reforms introduced a start-up allowance (Existenzgründungszuschuss, “Ich-AG”) in order to help a larger group of people find their way into self-employment. Long-term analyses conducted by IZA find that both programs are effective at integrating participants in the labor market and improving their incomes. The subsidized start-ups also create additional jobs for other (previously unemployed) individuals (IZA DP 3880). Given these positive findings, it is difficult to understand why the successful start-up programs were recently cut again.
Another subject of investigation by IZA was the new strategy initiated by the Hartz reforms in the area of subsidized further training. The certification of service providers, the increase in competition caused by the introduction of a voucher system, and the improved selection of program participants made the programs significantly more effective and efficient (IZA DP 2069, IZA DP 3910, IZA Research Report 10).
In addition, IZA analyzed the so-called transfer programs, include a short-time work allowance (Transfer-Kurzarbeitergeld), which aim at supporting and facilitating the job transition for employees facing layoff due to corporate restructuring. While the evidence found no evidence of positive effects, the reforms at least mitigated the negative effects that were previously found (IZA Research Report 10). However, considering the limited effectiveness and the high costs of these programs, they should be critically reviewed.
A widely debated element of the Hartz reforms was the expansion of small-scale employment (mini/midi jobs). An IZA study found that these jobs had negative fiscal effects and tended to displace regular employment (IZA Research Report 47). On the other hand, they had a positive impact on the search behavior of unemployed individuals, who are able to complement their income during unemployment spells by working up to 15 hours per week. Lower social security contributions provide an incentive to take up this form of employment, which is particularly attractive for the long-term unemployed (IZA DP 6499). Thus, small-scale employment contributes at least indirectly to improving reintegration prospects.
Beyond the overall positive findings with regard to active labor market policies, another IZA study showed that unemployed individuals with a perceived high probability of joining a program lowered their reservation wages and increased their search efforts (IZA DP 3825). In other words, the existence of a program alone has a “deterrent” effect in a positive sense. Further research will need to examine whether this affects the quality of subsequent employment.
Other IZA studies on German labor market trends since the mid-2000s concentrated on the role of “standard employment contracts” and “atypical employment” (IZA Research Report 22, IZA Research Report 23, IZA Research Report 25). Flexible forms of employment account for a large share of the newly created jobs. This was particularly beneficial for the previously underdeveloped German service sector. There are now more jobs, but also more types of jobs.
In analyzing these issues, IZA was able to draw on the expertise of its strong research network, the largest network of labor economists worldwide. IZA research fellows and affiliates contributed a number of studies on German labor market policies and, in particular, activation programs. For example, macroeconomic studies empirically confirm that the reforms have reached their main goal to shorten individual unemployment spells (IZA DP 2470). Job placement became much faster and more efficient. The “Agenda 2010” also increased the overall effectiveness of active labor market policy in Germany (IZA DP 2100).
In sum, the Hartz reforms and the “Agenda 2010” mark the beginning of a new area in German labor market policy with a long overdue redesign of the German employment model. The outstanding performance of the German labor market during the current crisis is owed, at least in part, to the “Agenda 2010” (IZA DP 6250, IZA DP 6625).
Now that the important parameters of active labor market policy have been adjusted, policymakers and scientific advisors must focus on how to prepare the German labor market for the dramatic consequences of demographic change. Improving education and “life-long learning” are just as essential as establishing family-friendly workplace practices and additional measures to promote female employment. Other aspects include more individual scope in shaping one’s working life and retirement, as well as enhancing Germany’s attractiveness for high-skilled immigrants. IZA will continue to accompany these necessary reforms in a critical and constructive manner.