Lessons from German Labor Market Policy Klaus F' Zimmermann IZA, DIW Berlin and Bonn University Sept

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Lessons from German Labor Market PolicyKlaus
F. ZimmermannIZA, DIW Berlin and Bonn University
September 25, 2009Chinese University of Hong
Kong
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Outline

• The German Labor Market An Overview
• Structural Deficits before 2003
• Major Labor Market Reforms (2003-2005, Hartz
  Reforms)
• ALMP The German Experience
• Conclusions The Design of Labor Market Policy

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The German Labor Market An Overview

• High unemployment as a central problem in
  post-unification Germany
• This has often been linked to
• The high level of employment protection
• The high labor costs
• The strictly regulated labor market
• Protection of employment risks characterized by
• High level of statutory employment protection for
  regular contracts
• Predominance of compulsory social insurance
  providing earnings-related benefits in case of
  unemployment after a sufficient contribution
  period
• Until 2005 also earnings-related long-term
  unemployment assistance
• Replaced by a means-tested flat rate benefit in
  2005 Major break with Germanys long tradition
  of status maintenance in case of unemployment
• Part of a broader policy shift towards activation
  (Hartz reforms)

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Unemployment in Germany (1960-2009)
Dotcom bubble
Hartz reforms
German reunification
Oil crises
Post-war economic boom
Source Federal Employment Agency

• In October 2008 the unemployment dropped under
  the level of 3 million for the first time since
  1992
• This might be an indication that the fundamental
  structural problems of the German labor market
  could have been decisively loosen by the Hartz
  reforms

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Policy Responses to the German Reunification

• After the German reunification, the integration
  of the East German economy led to an increase in
  unemployment
• The political decision to finance a large share
  of the transition costs through social insurance
  contributions (and not by general taxation)
  increased the burden on labor costs
• Policymakers reacted in a selective way
• Higher non-wage labor costs put pressure on
  standard forms of employment and dampened new
  employment opportunities
• Growth of flexible jobs, i.e., non-standard forms
  of employment, facilitated by several legislative
  steps that required less employment regulation,
  involved lower or no non-wage labor costs, or
  offered even subsidies for such employment forms
• Additionally, active labor market policy (ALMP)
  measures were extensively used in East Germany
• In particular, public training programs and job
  creation schemes

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Post-Unification Germany Development of
Standard vs. Non-Standard Forms of Employment
Source Federal Employment Agency

• Non-standard forms of employment gained
  importance in recent years
• Increase particularly strong in 2003 and 2004

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Post-Unification Germany Extensive Use of Job
Creation Schemes and Public Training Programs
... but both traditional ALMP measures in
Germany lost importance in recent years
Source Federal Employment Agency.
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Labor Market Institutions Historical Perspective

• Compulsory unemployment insurance introduced in
  1927(complementing existing insurances for
  health, accident and old age)
• A generous benefit system emerged after World War
  II, especially during the economic boom in the
  1960s
• ALMP introduced when unemployment started to rise
  in the 1970s
• When unemployment was still low, measures were
  designed to prevent rather than to combat
  unemployment
• After German reunification, ALMP played a central
  role in alleviating the social consequences of
  the breakdown of the economy in East Germany
• For instance, in 1992 the number of individuals
  participating in job creation schemes or
  training programs exceeded the number of
  unemployed (in East Germany)

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Labor Market Institutions Set-Up during the 1990s

• Unemployment benefits (UB) meant to maintain the
  workers social status during unemployment rather
  than providing a safety net as a last resort
• Duration 6 to 32 months (depending on previous
  employment duration and age)
• Amount 67 percent of last net income maximum
  4,250 per month(60 percent without children)
• Financing unemployment insurance contributions
  (employers/employees)
• Unemployment assistance (UA) paid after UB
  entitlement period had expired
• Duration without time limit (!)
• Amount 57 percent of last net income(53 percent
  without children)
• Financing taxes
• Social assistance (SA) as a possibility to
  supplement UB/UA
• Every household with an income below a certain
  threshold qualified for SA

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Labor Market Institutions The Need for Reforms
(1/2)

• Passive Labor Market Policy
• Unlimited UB/UA payment duration extraordinary
  feature of the German system
• Replacement rates for long-term unemployed were
  higher than in any other OECD country (OECD,
  2004)
• Replacement rates for short-time unemployed
  comparable to many other OECD countries
• Incentives to take up a job were very low,
  especially for low-skilled
• Generous benefit levels
• High benefit reduction rates

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Labor Market Institutions The Need for Reforms
(2/2)

• Active Labor Market Policy
• High expenditure levels and long durations of
  programs
• Most important programs
• Job creation schemes
• Training programs
• Job search assistance and monitoring was given
  low priority
• Sanctions were rarely implemented
• Assignment to programs based on the caseworkers
  discretion (no systematic individual profiling)
• No systematic evaluation

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Major Labor Market Reforms (2003-2005)Hartz
Reforms

• Implementation in four waves (Hartz I-IV)
  between 2003 and 2005
• Hartz I-III
• Stronger role of activation (e.g. sanctions)
• Significant reduction of long-term benefits
• Massive deregulation of fixed-term contracts,
  agency work and marginal part-time
• Hartz IV
• Restructuring of the unemployment benefit and
  social assistance schemes
• Means-tested flat-rate benefit replaced
  earning-related long-term unemployment
  assistance

? Implementation of the reforms was tied to an
evaluation mandate
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Underlying Principles of the Reforms

• improving employment services and policy
  measures
• activating the unemployed according to the
  principles of right and duties
• stimulating employment demand by deregulating the
  labor market
• Shift towards activation, effectiveness and
  efficiency

core element principle of rights and duties
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Threefold Reform Approach (1/3)

• Improving employment services and policy
  measures
• Re-designing of old measures and introduction of
  new measures of ALMP
• Modernization of employment services along the
  lines of New Public Management
• Results-based accountability of local employment
  offices
• Outsourcing of many offices
• Open competition between private service
  providersCustomer-orientated one-stop-centers,
  offering individual profiling, job search
  assistance, social services and administration of
  benefit payments

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Threefold Reform Approach (2/3)

• Activating the unemployed according to the
  principle of right and duties
• Implementation of an activation strategy in
  various policy changes
• Priority to measures that support unemployed
  workers who are pro-actively seeking integration
  into regular employment
• Introduction of jobs exempt from any or with
  reduced social security contributions to take up
  employment in low wage sector
• Minijobs/ Midijobs
• Restructuring of the benefit-system
• Reduction of unemployment benefit levels and
  durations
• Eligibility for subsistence allowances according
  to a person's ability to work rather than
  according to previous contribution payments
• Possibility of benefit sanctions and reductions

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Threefold Reform Approach (3/3)

• Stimulating employment demand by deregulating the
  labor market
• Deregulation of the temporary work sector
• Introduction of exemptions from restrictions on
  fixed-term contracts and dismissal protection

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Overall Reform Effects Evolution of the German
Labor Force (1992-2007)
Decrease in the share of inactive individuals
Growth of flexible jobs
Decrease in the share of permanent full-time
employment
Source SOEP
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Growth of Flexible JobsOECD EPL Index
(1985-2008)
Continuous deregulation of temporary contracts
Source OECD
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ALMP Lessons from the Mandatory Evaluation

• Only a small part of the German ALMP effectively
  improves individual reemployment probabilities
• Training programs
• Start-up subsidies
• Wage subsidies
• Placement vouchers
• ... but further evaluation needed to assess
  long-term effects
• Reduced range of ALMP
• Focus on programs with proven positive effects

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Lessons learned? ALMP Expenditures in Germany
have decreased by about one-third (2002-2006)

• Expenditure increased
• Start-up subsidies
• Expenditure decreased
• Training programs
• Job creation schemes
• Wage subsidies

(in million )
Source Eichhorst and Zimmermann (2007)
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Further Results of the Mandatory Evaluation

• Re-organization of public employment services
  mainly successful counseling and placement
  were intensified in the course of the reforms
  with the exception of outsourcing of services
• Re-designing training programs seems to have
  improved their effectiveness
• Significant positive effects of the redesigned
  wage subsidies and start-up subsidies
• Job creation schemes continue to be detrimental
  for participants employment prospects

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The Example of Training Programs Training
Vouchers and Stricter Selection Criteria

• Overall finding
• The effectiveness of training programs for the
  unemployed has increased after the reforms
• ... but which features of the reforms have
  caused this increase and to what extent?
• Introduction of training vouchers
• Job seekers are free to select their training
  provider in the market (previously this choice
  was made by the caseworker)
• Stricter selection criteria
• Stricter selection of the participants by the
  caseworkers based on the expected reemployment
  probability

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Decomposing the Reform Impact on the
Effectiveness of Training Programs
Voucher Effect
Selection Effect
Source Rinne, Uhlendorff and Zhao (2008)

• Introduction of vouchers increased the
  effectiveness of training programs in Germany
• Stricter selection does not improve effectiveness

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Conclusions How to effectively design labor
market policy?

• Two elements of passive labor market policy
• Maintaining the workers social status during
  unemployment(for a predetermined, finite period)
• Providing a safety net as a last resort
• Systematic approach towards active labor market
  policy
• Evaluate the programs effectiveness
• Focus on programs with proven positive effects
• Activating the unemployed
• Principle of rights and duties
• Efficient placement services(but networks in
  general more efficient)
• Flexibility AND Security

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Klaus F. Zimmermann IZA, DIW Berlin and Bonn
University IZA, P.O. Box 7240, 53072 Bonn,
Germany Phone 49 (0) 228 - 38 94 0 Fax 49 (0)
228 - 38 94 180 E-mail zimmermann_at_iza.org www.iz
a.org