A strong flexible labor market

How did the reforms of the last decade impact the unemployment rate in Germany? – A strong flexible labor market When Gerhard Schröder took to the podium in the Bundestag on March 14th, 2003, Germany was called the “sick man of Europe”. A widespread assumption was that unemployment could never be defeated, The Economist Introduction: The German labor market experienced remarkable transitions during the past decade. In the beginning of the millennium, Germany was a country with an unemployment rate (see appendix 1) ranging between 9.5% and 11.5% (Deutsche Bundesbank) with almost 39 million people employed all over the country (see appendix 2). Until the beginning of 2003, the governmental support to unemployed people consisted of three main patterns: unemployment insurance, unemployment assistance, and supplementary social welfare. Supporting these three pillars, Germany was suffering high costs with long-term unemployment benefits, low job acceptance rate and bigger proportion of low-skilled labor. Between 2003 and 2006, the German federal government implemented series of reforms aiming to impact the supply side of labor by increasing incentives for unemployed workers to accept jobs and reducing the level and duration of their benefits. With this research paper, we will analyze the impact of these reforms in the unemployment rate. The Agenda 2010: The agenda 2010 was a series of reforms organized and executed by the federal government SPD and B’90/Greens collation of Germany on March 2003. The goal was to reform the German social system and, even more important, the labor market. Focusing on the labor market, the reform was called after the man who created this, Mr. Hartz (Uhlig, 2011). The key change of the reform was the merger between unemployment assistance and supplementary social welfare. The target was to pay unemployment people on basic needs, family status, and essentially on willingness to work. With this if unemployed people are not willing to accept a job after a certain “stabilization period” (retraining, schooling), their social benefits will be cut. With regards to unemployment benefits and labor market, the main points developed in the Agenda 2010 impacted the following aspects: flexibility of companies, protection of the firm-specific human capital, labor hoarding and short-term work subsidy (Krause, 2011).

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A strong flexible labor market

1. Flexibility of companies: The flexibility of companies was one of the main points of the Agenda 2010. Changes in the labor market and social partnerships have supported several networks for extending internal flexibility. During the last two decades, a significant feature affecting the companies in the labor market has been the growth of flexible working hours through working hour’s accounts. Previously in 1999, a third of the labor force used to use chips, cards, etc. for working hour’s accounts. This has increased even more after the implementation of the Agenda 2010. This change allows companies to adjust to business cycles. As for times of economic upswing - such as from 2007 to 2010 - employees make an essential surplus of working hours. As a result, when the negative business cycle becomes reality, this surplus and buffer of working hours is a clever method for firms to react to it, by pushing their employees to decrease their overtime or even to accumulate deficits for the future (IAB, 2009). Another impact, which was introduced, was the ‘alliances for jobs’. This encouraged an employee voluntarily to wage deduction but in exchange they are assured job security and stability for the future. This has helped companies to reduce costs for a certain time period, especially through problematic times (Blanchard & Wolfers, 2000). 2. Protection of the firm-specific human capital: Germany is highly recognized for their specialized and highly trained work force. This is an extreme asset which companies are not willing to mislay. According to Bach and Spitznagel (2009) and their research paper ‘evidence for the costs of replacement’, hiring and training costs for those highly trained workers are tremendous investments for companies and will have future impact in their results, especially given the impact of Germany’s demographic prospects. Consequently, companies are highly interested in keeping their core workforce stable and to hold employees. Profit sharing systems and the use of temporary workers (further explained in the document) can be introduced to keep their work force stable. Also with the Agenda 2010, comes the transfer of the risk to suppliers. Global firms who have suppliers all over the world might be incorporated to the extent of cross-boarder outsourcing. Therefore, a higher effort in restructuring and reorganizing the work force in production processes organizations strengthens the internal or external training of workers. Thus, employees might be employed in events with no instantaneously noticeable productivity. As a result, this does not help productivity in the short-term, however, in the long-term, this has an impact for both firms and employees. 3. Labor Hoarding and Short-term work subsidy: A further impact of the reforms is labor hoarding, highly tailored for a downward economic situation. Labor hoarding can be realized either through a decrease in working hours and/or a drop in productivity/work intensity.

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A strong flexible labor market

Mentioning the change in the productivity per hour has achieved to the buffering effect, which corresponds to a decrease in productivity and or work intensity. This is what happened it Germany during the rough times of the financial crisis. As a result, a decrease of 1% in productivity was created in manufacturing companies. In figures and after Bentolila and Bertola (1990), a 1% decrease in productivity has lead to 1 more million people employed needed for the same products to be produced. As work was less, the same amount of employees could be hold. From history, the reduction of productivity in Germany has not been aroused for decades. The contrary has usually been the case in terms of an increase in productivity. The examination of the short-time work subsidy arrangement has been the case for East Germany up to this point. Nevertheless, the manufacturing companies from the West needed to introduce the short-time work subsidy scheme in order to fund the expenses of labor hoarding. This scheme has been used especially in automotive sector, metals, plastics, and textile industries. In 2009 for example, in these industries, the short-term work was as high as 50%. The subsidized short-term scheme is defined as a decrease in working hours of about 40% and around 6 months of duration. Companies, therefore, are able to react to certain cyclical and unexpected macro economical effects. This subsidy gives employers the opportunity to restructure their business (Bach, Hummel, Klinger, Spitznagel, & Zika, 2010). The impact: With the reforms in the labor market, Germany started to shift to a more flexible labor market, shown with low unemployment rates (see appendix 3)(Werner Eichhorst, 2013). The decrease in the unemployment rate has successfully achieved. There was a clear need for change as the previous model was perceived as extremely rigid. Also, although the world recession hit Germany more than the average OECD country in 2008, the increase in unemployment was surprisingly insignificant and consequently the unemployment rate has been very low when compared to other top performing countries (appendix 4). Germany presents, after these reforms, a solid and flexible labor market proving to be able to respond to economic downturns and promoting equal opportunities in the market. This fact is represented by the low youth unemployment rate (see appendix 5) in Europe. As shown by previous research (Möller, 2010), after a series of reforms to the unemployment insurance system, the long-lasting unemployment assistance was entirely abolished. Workers now transit relatively quickly from the initial unemployment benefit into means-tested welfare

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A strong flexible labor market

Bibliography:
Bach and Spitznagel (2009). cite evidence for the costs of replacement in the order of magnitude up to 32,000 Euros. Bach, H.-U., Spitznagel, E. (2009). Kurzarbeit: Betriebe zahlen mit – und haben was davon. IABKurzbericht. Bach, H.-U., Hummel, M., Klinger, S., Spitznagel, E., Zika, G. (2009). Arbeitsmarkt Projektion 2010. Die Krise wird deutliche Spuren hinterlassen. IAB-Kurzbericht. Blanchard, O., Wolfers, J. (2000): The role of shocks and institutions in the rise of European unemployment: the aggregate evidence. Econom. German Council of Economic Advisers (2010): Jahresgutachten: 2009/10. Die Zukunft nicht aufs Spiel setzen. Harald Uhlig (2011). University of Chicago and Deutsche Bundesbank. Transition in the German labor market: structure and crisis. IAB, Institut für Arbeitsmarkt- und Berufsforschung (2009). Durchschnittliche Arbeitszeit und ihre Komponenten in Deutschland retrieved from http://doku.iab.de/grauepap/2009/tabaz09q3.pdf. Joachim Möller (2010). Institut für Arbeitsmarkt- und Berufsforschung 2010. The German labor market response in the world recession – de-mystifying a miracle. Michael U. Krause (2011). Deutsche Bundesbank. Transition in the German labor market: structure and crisis.

The Economics (2010),. Retrieved from http://www.economist.com/news/europe/21573583-ten-years-how-does-germanysagenda-2010-package-rate-wunderreform. Werner Eichhorst (2013).Konrad Adenauer Stiftung. The European Labour Market Success Through Flexibility and Mobility retrieved from http://www.kas.de/wf/en/33.34465/. Deutsche Bundesbank (2013) retrieved from http://www.bundesbank.de.

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A strong flexible labor market

Appendices: Appendix 1:

Appendix 2:

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A strong flexible labor market

Appendix 3:

Appendix 4:

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A strong flexible labor market

Appendix 5: