Hartz IV: the Solution to the Unemployment Problems in the Eurozone?

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Bofinger, Peter Article Hartz IV: The Solution to the Unemployment Problems in the Eurozone? Intereconomics Suggested Citation: Bofinger, Peter (2017) : Hartz IV: The Solution to the Unemployment Problems in the Eurozone?, Intereconomics, ISSN 1613-964X, Springer, Heidelberg, Vol. 52, Iss. 6, pp. 353-357, http://dx.doi.org/10.1007/s10272-017-0703-6 This Version is available at: http://hdl.handle.net/10419/213151 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu DOI: 10.1007/s10272-017-0703-6 Unemployment Peter Bofi nger Hartz IV: The Solution to the Unemployment Problems in the Eurozone? The Hartz IV reforms are consistently regarded as a successful German model for the reduction of structural unemployment. Is it therefore appropriate to advise other member states of the European monetary union to carry out similar reforms? This paper strongly disagrees, arguing that the reduction in unemployment in Germany since 2005 is mainly due to cyclical factors and to the petering out of the negative employment effects caused by the economic transformation after German unifi cation. The reforms of the Agenda 2010, which were announced lously healed by Chancellor Schröder’s Agenda 2010. by German Chancellor Gerhard Schröder in March 2003 But this fi nding, which was analytically supported by and for the most part implemented in January 2005, are Hans-Werner Sinn’s best-selling book Can Germany Be widely seen as the main cause of the impressive perfor- Saved, was simply wrong. This becomes clear when one mance of the German economy today. This is particu- considers the therapy that Sinn prescribed in 2005. He larly true of the marked improvement in the condition of called for a wage reduction in Germany of 10 to 15%, the labour market. Accordingly, similar reforms are now and for low-skilled workers he even envisaged a reduc- recommended for the Economic and Monetary Union tion of one-third.1 (EMU) member states suffering from serious unemployment problems. However, this success story has very I have already questioned the “sick man” diagnosis in seldom been challenged analytically. Is the impressive my 2004 book Wir sind besser, als wir glauben (English economic competitiveness of German fi rms really the re- translation: We Are Better Than We Believe We Are).2 In sult of more fl exible labour markets and, above all, the particular, I pointed out that many of the problems that reduction in support for the long-term unemployed? Or existed at that time were caused by the challenging eco- is it due to the pronounced wage moderation in Germany nomic transformation taking place in East Germany. At that had started years before the Hartz reforms were im- the beginning of the 2000s, transformation-related un- plemented? For the functioning of the EMU, these are employment in East Germany was still very high, so it decisive questions. While more fl exibility could be re- is not surprising that the German social security system garded as a positive sum game, wage moderation is a was strained. defi nitive zero-sum game which is associated with a de- fl ationary bias for the euro area. Considering the huge economic challenges of reunifi cation, the German economy exhibited impressive strength The “sick man” of Europe: a fl awed diagnosis even in the early 2000s. West Germany, with its 61 million inhabitants in 1990, was from the very start able In the discourse of economists and politicians today, the to provide the 16 million citizens of the former German diagnosis of Germany as the “sick man” of Europe in the Democratic Republic a high level of social benefi ts and fi rst half of the 2000s plays a decisive role. It serves as the rapid modernisation of the mostly obsolete infra- the basis for the narrative that the economy was miracu- structure. Moreover, from 1989 to 2006, 2.8 million immi- grants from the former Soviet Union arrived in Germany and obtained German citizenship immediately. This gave them full access to the social security net. While the un- Peter Bofi nger, University of Würzburg, Germany; and German Council of Economic Experts, Wies- 1 H.-W. Sinn: Ist Deutschland noch zu retten?, Berlin 2005, Ullstein, p. 113. baden, Germany. 2 P. Bofinger: Wir sind besser, als wir glauben, Munich 2004, Pearson Studium. ZBW – Leibniz Information Centre for Economics 353 Unemployment employment rate of this group was very high, it was nev- in West Germany fell by 1.3 million and in East Germany er recorded separately in the unemployment statistics.3 by 900 000. Direct labour market effects of the Hartz IV reform But this simple evidence requires a more detailed anal- ysis that considers cyclical factors and the specifi c ef- The core of the Agenda 2010 is the so-called Hartz re- fects of reunifi cation. In order to identify cyclical factors, form, in particular the reduction of benefi ts for the long- it is necessary to compare years with similar output term unemployed (Hartz IV). Before this reform, the long- gaps.6 According to OECD estimates, the year 2005 ex- term unemployed received benefi ts under the unemploy- hibited a strong negative relative output gap of -1.7%. It ment assistance scheme (Arbeitslosenhilfe). The benefi ts was obviously a recession year. This is also refl ected by amounted to 53% of previous net income. Hartz IV com- the ratio of unemployed to vacancies. In 2005 there were bined unemployment assistance with social assistance 22 unemployed for every vacancy. that was granted to people without an entitlement to unemployment benefi ts. As a result, the long-term unem- For a comparison with 2016 – with a positive output ployed received monthly fi nancial support that was no gap of 1.1% – the most suitable year is 2001, for which longer related to their previous income. Thus, Hartz IV the OECD estimates an identical positive output gap of implies a relatively strong reduction of the benefi ts for 1.1%. A comparison of the unemployment fi gures for high-skilled workers, while for low-skilled workers, the these years in West Germany shows a reduction in the fi xed payment under Hartz IV can be equivalent to or number of unemployed of just 350 000. Thus, there re- even higher than the 53% replacement rate of the unem- mains very little support for the “Hartz miracle”. In East ployment assistance scheme. This is especially the case Germany, the reduction in the number of unemployed by for families with children.4 820 000 remains impressive. However, this can primarily be attributed to the phasing out of the transformation- To most observers, the success of these reforms be- induced employment effects. As employment in East comes obvious in the light of the trend break in the de- Germany has remained constant compared to 2001, the velopment of unemployment in Germany in 2005. Up un- decline in unemployment must be mainly related to the til this point, unemployment had been increasing in West shift of workers into the pension system. Germany since the 1970s and in reunifi ed Germany since 1990. The peak was reached at a seasonally adjusted The development of long-term unemployment fi gures fi gure of over 5 million unemployed people in March presents a similar picture. It is often argued that Hartz 2005.5 Since then, the employment situation has stead- IV induced especially strong incentive effects in this re- ily improved, with the number of unemployed individuals gard. If one once again compares the years 2001 and falling to only 2.5 million in autumn 2017. Between 2005 2016, a very small decline in long-term unemployment and 2016, the average number of unemployed persons is recorded for West Germany, from 817 000 to 727 000 persons. Again, the picture is different for East Germany, with a reduction of 270 000 persons. 3 A. Brück-Klingberg, C. Burkert, H. Seibert, R. Wapler: Spät- aussieder mit höherer Bildung sind öfter arbeitslos, IAB-Kurzbericht No. 8/2007, 2007. These fi ndings are supported by more detailed stud- 4 This is confi rmed by H. Goecke, J. Niehues: Verteilungswirkungen ies analysing the duration of long-term unemployment. der Agenda 2010. Eine Mikrosimulationsanalyse der Hartz-IV-Reform, Fehr and Vobruba show that since the Hartz reforms, the Cologne Institute for Economic Research, 11 December 2014. In this paper, distribution effects were calculated for 2011. Regarding the episodes of unemployment for recipients of Hartz IV and distribution effects until 2010, it has to be considered that a tempo- the predecessor system of Arbeitslosenhilfe have not be- rary premium was granted to individuals receiving Unemployment come shorter.7 Indeed, when taking socio-demographic Benefi t II.

Load more