What Can We Learn fromthe German Labor Market Miracle?
Employment – Global and Country Perspectives NYU Stern - ICRIER
New York September 28, 2011
Holger BoninCentre for European Economic Research (ZEW)
Recent German Labor Market History...
... according to the Board of Economic Advisors
2004 Employment decline stops, but labor market remains in desolate state
2005 Continue on the reform path!
2006 On the way to higher employment
2008 Again good news from the labor market
2007 Good news from the labor market
2009 The labor market dragged by the severe recession
2010 Surprisingly good labor market development despite the crisis
2011 ???
The German Miracle...
... started before the CrisisUnemployment Rates
... started before the CrisisUnemployment Rates
2005 is the Turning PointEmployment
2005 is the Turning PointEmployment
The Reform of 2005 – „Agenda 2010“
„From now on, we will not allow anybody to sit back and do nothing , we will sanction those who reject reasonable work ...“
Chancellor Schroeder
Principles of the Agenda 2010
Evidence based policy making
„Promoting and Demanding“
Faith in the functionning of markets
Specific – Good – Measures
Unified system of social welfare for the long-term unemployed
Benefit cut after one year for those previously employed
„Employable“ status for those previously on social welfare
Joint responsibility of local municipalities and Federal Labor Agency
Uniform benefit rules for all short-term unemployed
Benefit cut for those close to – early – retirement
Specific – Good – Measures
Concentration on effective active policies
Support of occupation-related learning
Subsidization of entry wages
Support of self-employment
Competition among employment services
And some Things that have NOT been Done
Promotion of numerical flexibilisation
Rather strict emplyoment protection legislation remains
Regulation of temporary work sector
Promotion of wage flexibility
Collective agreements often binding for units not involved in
bargaining
Minimum wages by collective agreement even on the rise
Structural Effects
Germany East Germany
West Germany
Unemployment Rate
Vac
ancy
Rat
e
0.0%
0.3%
0.5%
0.8%
1.0%
1.3%
1.5%
1.8%
2.0%
2.3%
2.5%
2003 2004 2005 2006 2007
Alter 47-51 Jahre Alter über 56 Jahre
Structural Effects – Focus on the Elderly
Inflow Rates into Unemployment
Age 47-51 Age 56 and older
Favorable Auxiliary Conditions
Activation Policies targeting the elderly and women(b) Frauen
0
10
20
30
40
50
60
70
80
90
100
20 – 25 25 – 30 30 – 35 35 – 40 40 – 45 45 – 50 50 – 55 55 – 60 60 – 65
Alter
Pro
zen
t
2000 2009 2014
Labor Force Participation Rates Women
Age
Pe
rce
nt
Favorable Auxiliary Conditions
Activation Policies targeting the elderly and women
Co-operative industrial relations
Pension reforms raising effective retirement age
Development of day care institutions
Co-operative Industrial Relations
Unit Labor Costs
Favorable Auxiliary Conditions
Activation Policies targeting the elderly and women
Co-operative industrial relations
Pension reforms raising effective retirement age
Development of day care institutions for children younger than 3
Long period of moderate wage growth
Opening clauses allow flexibility at decentralized level
A well-trained labor force – apprenticeship training as the normProductivity gains through firm-specific knowledge and long tenure
A – relatively – safe harbor for the youth
Agenda 2010 – and Next?
Current changes of labor market policies paradigms
Germany is opening for immigrants
Development of cognitive and non-cognitive skills as pre-emptive
labor market policy
Current ThreatsLabor supply shortages in certain areas
Demographic change
Introduction of a general minimum wage?
What can We Learn from theGerman Labor Market Miracle?
Underneath Germany’s labor market performance is true structural change, result of bold reforms and wage restraint.
Germany relies on an internal numerical and functional flexibility model. Cooperative industrial relations and well-educated employees support this scheme.
The success would not have been possible without the establishment of a low wage sector by putting more pressure on the less qualified.
What can We Learn from theGerman Labor Market Miracle?
Institutions matter. Market orientation, customer orientation and quantitative targets of labor agencies help. Centralization – combined with local knowledge – has advantages.
Program evaluation matters. Set clear outcome targets. Concentrate on programs with a proven effect. Allow trial periods for new measures.
(Dis-)Incentives matter. Rethink unemployment benefit and early retirement schemes.
What can We Learn from theGerman Labor Market Miracle?
Implementing fundamental reform requires an opportunity. In Germany a scandal initiated the process, which helped decision makers to obtain initial backing.
Structural reforms, even if they are successful, are politically risky. The Schroeder government was not re-elected.
Political marketing matters. German reformers failed heavily on the communication side.