CHARLES UNIVERSITY Master's Thesis 2021
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CHARLES UNIVERSITY
FACULTY OF SOCIAL SCIENCES
Institute of International Studies
Department of German and Austrian Studies
Master's Thesis
2021 MartinSlaba
CHARLES UNIVERSITY
FACULTY OF SOCIAL SCIENCES
Institute of International Studies
Department of German and Austrian Studies
Hartz IV and the Labour Market Miracle – Causality or
Coincidence?
Master's thesis
Author: Bc. Matin Slaba
Study programme: German and Austrian Studies
Supervisor: PhDr.ZuzanaLizcová, PhD.
Year of the defence: 2021Declaration 1. I hereby declare that I have compiled this thesis using the listed literature and resources only. 2. I hereby declare that my thesis has not been used to gain any other academic title. 3. I fully agree to my work being used for study and scientific purposes. In Prague on 30th April 2021 Martin Slaba
References SLABA, Martin. Hartz IV and the Labour Market Miracle – Causality or Coincidence?. Praha, 2021. 97 pages. Master’s thesis (Mgr.). Charles University, Faculty of Social Sciences, Institute of International Studies. Department of German and Austrian Studies. Supervisor PhDr. Zuzana Lizcová, PhD. Length of the thesis: 122 522 characters
Abstract This thesis examines the effects of the so-called Hartz IV reform on the German labour market development, with special emphasis on unemployment reduction. To determine the causal link, a variety of tools are used, namely macroeconomic studies, worker flow analysis, surveys, and comparison with competing arguments. Preponderance of evidence suggests, that Hartz IV played a significant role in unemployment rate reduction in the period following its implementation. Size of this effects is hard to discern exactly, but an estimate in the range of 1,5-2 percentage points should be quite accurate. Contrary to popular belief, this reduction did not occur to the detriment of general job quality, such as by splitting of old jobs or by dilution of their working hours. Furthermore, the issue of relative poverty is investigated. The thesis concludes that the increase in relative poverty was not caused primarily by Hartz IV, nor is it a good measure of actual living standard. The increase is mostly a by-product of increasing inequality, that stretches the income spectrum. Abstrakt Tato práce se zabývá dopadem reformy Hartz IV na vývoj německého pracovního trhu, se speciálním zaměřením na snížení nezaměstnanosti. K navázání kauzálního spojení bylo použito několik nástrojů, konkrétně makroekonomické studie, analýza toků pracovníků, anketní šetření a porovnání s odpůrnými argumenty. Většina důkazů nasvědčuje tomu, že reforma hrála významnou roli ve snížení míry nezaměstnanosti v době po její implementaci. Je těžké určit velikost dopadu přesně, ale odhad v rozmezí 1,5-2 procentních bodů by měl být poměrně přesný. Přes mylné představy mnohých, k tomuto snížení nedošlo na úkor zhoršení kvality stávajících zaměstnání, i přes obavy z rozdělování zaměstnání na plný úvazek na více zaměstnání s částečným úvazkem, či z naředění pracovní doby. Otázka chudoby v návaznosti na zavedení Hartz IV byla také prozkoumána. Závěrem této práce je, že zvýšení relativní chudoby nebylo primárně následkem reformy, navíc se tento ukazatel nezdá být dobrým měřítkem životní úrovně. Zvýšení relativní chudoby se zdá být vedlejším produktem zvyšující se nerovnosti, která roztahuje příjmové spektrum.
Keywords Hartz IV, Agenda 2010, Welfare state, Labour market miracle, Unemployment, Relative Poverty Klíčová slova Hartz IV, Agenda 2010, Sociální stát, Zázrak pracovního trhu, Nezaměstnanost, Relativní chudoba Title Hartz IV and the Labour Market Miracle – Causality or Coincidence? Název práce Hartz IV a zázrak pracovního trhu – Kauzalita nebo shoda náhod?
Acknowledgement I would like to express my deep gratitude to my thesis supervisor PhDr. Zuzana Lizcová, PhD. for her great leadership, useful tips, and quick responses. I would also like to thank doc. PhDr. Ota Konrád, Ph.D. for the discussions in master thesis seminar.
ZÁVĚREČNÉ TEZE MAGISTERSKÉ PRÁCE NMTS Závěrečné teze student odevzdává ke konci Diplomního semináře III jako součást magisterské práce a tyto teze jsou spolu s odevzdáním magisterské práce do SIS předpokladem udělení zápočtu za tento seminář. Jméno: Martin Slaba E-mail: 72518255@fsv.cuni.cz Specializace (uveďte zkratkou)*: NRS Semestr a školní rok zahájení práce: ZS 2019/2020 Semestr a školní rok ukončení práce: LS 2020/2021 Vedoucí diplomového semináře: doc. PhDr. Ota Konrád, Ph.D. Vedoucí práce: PhDr. Zuzana Lizcová, Ph.D. Název práce: The Hartz IV Reform and the Labour Market Miracle - Causality or Coincidence ? Charakteristika tématu práce (max 10 řádek): Diplomová práce se zabývá reformou Hartz IV a jejím vlivem na pracovní trh v Německu, především na nezaměstnanost. Tyto reformy Hartz vznikaly v době, kdy se Německo potýkalo s jednou z nejvyšších měr nezaměstnanosti v Evropě. Tato nezaměstnanost byla z velké části strukturální a dlouhodobá. Reformy Hartz I-III měly napomoci zlepšení a zefektivnění úřadů napomáhajících nezaměstnaným v hledání práce a poskytnutím incentiv ve formě různých subvencí. Nejkontroverznější zákon Hartz IV pak razantně snížil podporu v nezaměstnanosti pro některé dlouhodobě nezaměstnané skupiny a značně změnil celý systém státní podpory v nezaměstnanosti. Nejčastější argumentem oponentů této reformy je, že reforma Hartz IV zásadně přispěla k růstu relativní chudoby. Výzkum tohoto tvrzení je druhým tématem diplomové práce. Vývoj tématu od zadání projektu do odevzdání práce (max. 10 řádek): Původně se práce měla zaměřovat na období velké finanční a hospodářské krize z let 2008/2009, a obdivuhodným výkonem Německa na poli nezaměstnanosti s ohledem na propad HDP. Důraz měl být na ekonomickou reakci Německého establishmentu na krizi a na krizový management. Během výzkumu ovšem autor zjistil, že mnohem významnější a zajímavější změny se odehrávaly ještě před krizí, a položily základ pro pozdější úspěšný krizový management. K těmto změnám kromě reforem Agendy 2010 patřilo třeba dobrovolné snižování reálných mezd, které vyšlo z kolektivního vyjednávání se vzácným souhlasem odborů. Pokrýt všechny tyto změny by ovšem bylo nad rámec jedné diplomové práce, proto se autor zaměřil pouze na reformu Hartz IV. Struktura práce (hlavní kapitoly obsahu): 1) Úvod 2) Přehled reforem 3) Vývoj pracovního trhu po zavedení reforem 4) Kauzalita - vliv Hartz IV na vývoj pracovního trhu 5) Hartz IV a Chudoba 6) Závěr Hlavní výsledky práce (max. 10 řádek): Na rozdíl od veřejné / politické debaty panuje mezi akademiky větší konsenzus, že reformy
opravdu do značné míry fungovaly tak, jak bylo plánováno, tedy že pomohly snížit strukturální nezaměstnanost. Byť nemohou samy o sobě vysvětlit celý pozorovaný pokles nezaměstnanosti (či nárůst zaměstnanosti) v letech po zavedení reformy, zdají se být dominantním faktorem. K tomuto závěru dochází většina autorů za použití různých metod. Velká část kritiky vychází ze špatného čtení statistik či z přehnaných očekávání. Podobné to je v případě údajného nárůstu chudoby. Zde totiž velmi záleží na definici. Autor dochází k závěru, že reformy nejen že nebyly zásadním důvodem nárůstu relativní chudoby, ale že relativní chudoba ani není velice vhodné měřítko pro posuzování objektivní finančí nouze. Prameny a literatura (výběr nejpodstatnějších): Alber, Jens and Jan Paul Heisig. “Do new labour activation policies work? A descriptive analysis of the German Hartz reforms”. WZB Discussion Paper, No. SP I 2011-211 (2011): 1- 54, https://www.econstor.eu/handle/10419/56791 Bonin, Holger. “The Two German Labour Market Miracles: Blueprints for Tackling the Unemployment Crisis?”. Comparative Economic Studies 54, (2012): 787–807, https://doi.org/10.1057/ces.2012.39 Burda, Michael and Jennifer Hunt. “What Explains the German Labor Market Miracle in the Great Recession?”. Brookings Papers on Economic Activity 42, No.1 (2011): 273-335, https://www.nber.org/papers/w17187 Carrillo-Tudela, Carlos et al. “The Fall in German Unemployment: A Flow Analysis”. CEPR Discussion Paper, No. 12846 (2018): 1-48, http://ftp.iza.org/dp11442.pdf Dlugosz, Stephan et al. “Fixing the Leak: Unemployment Incidence Before and After the 2006 Reform of Unemployment Benefits in Germany”. ZEW Discussion Paper, No. 09-079 (2009): 1-28, ftp://ftp.zew.de/pub/zew-docs/dp/dp09079.pdf Goecke, Henry et al. “Zehn Jahre Agenda 2010: Eine empirische Bestandsaufnahme ihrer Wirkungen”. IW policy paper, No. 7/2013 (2013): 1-33, https://www.iwkoeln.de/fileadmin/publikationen/2013/110085/Agenda_2010_policy_paper.pdf Hartung, Benjamin et al. “What Hides behind the German Labor Market Miracle? Unemployment Insurance Reforms and Labor Market Dynamics”. IZA Discussion Paper, No. 12001, (2018): 1-66, http://ftp.iza.org/dp12001.pdf Hassel, Anke and Christof Schiller. Der Fall Hartz IV: Wie es zur Agenda 2010 kam und wie es weitergeht. Frankfurt: Campus Verlag, 2010. Hochmuth, Brigitte et al. “Hartz IV and the Decline of German Unemployment: A Macroeconomic Evaluation”. IZA Discussion Paper, No. 12260, (2019): 1-48, http://ftp.iza.org/dp12260.pdf Jahn, Elke and Enzo Weber. “Zeitarbeit: Zusätzliche Jobs, aber auch Verdrängung”. IAB Kurzbericht, No. 2 (2013): 1-6, https://www.econstor.eu/handle/10419/158396 Krebs, Tom and Martin Scheffel. “Macroeconomic Evaluation of Labor Market Reform in Germany”. IMF Economic Review 61, No. 4 (2013): 664-701, https://doi.org/10.1057/imfer.2013.19 Rinne, Ulf and Klaus F. Zimmermann. “Is Germany the North Star of Labor Market Policy?”. IMF Economic Review 61, No. 4 (2013): 702–729,
https://doi.org/10.1057/imfer.2013.21 Rothe, Thomas and Klaus Wälde. “Where Did All the Unemployed Go? Non-standard work in Germany after the Hartz reforms”. Gutenberg School of Management and Economics Working Paper, No. 1709 (2017): 1-24, https://download.uni- mainz.de/RePEc/pdf/Discussion_Paper_1709.pdf Streeck, Wolfgang and Christine Trampusch. “Economic reform and the political economy of the German welfare state”. German Politics 14, No. 2 (2005): 174-195, https://doi.org/10.1080/09644000500154490 Schäfer, Holger and Jörg Schmidt. “Einkommensmobilität in Deutschland – Entwicklung, Strukturen und Determinanten”. IW Trends 36, No. 2 (2009): 1-17, https://doi.org/10.2373/1864-810X.09-02-06 Etika výzkumu:** Není relevantní Jazyk práce: Anglický Podpis studenta a datum 27.04.2021 Schváleno Datum Podpis Vedoucí práce Vedoucí diplomového semináře Vedoucí specializace Garant programu
Table of Contents
INTRODUCTION ........................................................................................................................................... 1
1 REFORM OVERVIEW ........................................................................................................................ 4
2 POST-HARTZ LABOUR MARKET DEVELOPMENT................................................................. 11
2.1 Unemployment .................................................................................................................... 12
2.2 Employment & Work volumes ............................................................................................ 19
2.3 Labour force participation ................................................................................................. 23
3 HARTZ IV – THE CAUSAL LINK ................................................................................................... 27
3.1 Macroeconomic studies ...................................................................................................... 28
3.2 Worker Flows ..................................................................................................................... 36
3.3 Competing Arguments ........................................................................................................ 41
3.3.1 Wage Moderation ............................................................................................................... 41
3.3.2 Euro and Exchange rate ..................................................................................................... 44
3.3.3 Constuction sector .............................................................................................................. 44
3.4 Survey ................................................................................................................................. 46
4 RELATIVE POVERTY ...................................................................................................................... 50
4.1 Hartz winner/loser breakdown ........................................................................................... 51
4.2 Relative poverty development ............................................................................................. 57
CONCLUSION .............................................................................................................................................. 66
SHRNUTÍ ....................................................................................................................................................... 69
LIST OF REFERENCES.............................................................................................................................. 70
Books …………………………………………………………………………………………………………70
Papers …………………………………………………………………………………………………………70
Internet Sources ................................................................................................................................ 74Introduction
The history of welfare state is one of expansion and growth. Since the inception of
Bismarckian social insurance, the welfare states all over the world have been increasing
their share on total national income and government expenditure while spreading into
various aspects of life, e.g.: child rearing, sickness, and unemployment. Retrenchments are
relatively rare and unpopular. It is therefore very surprising that one of the most radical
retrenchments of the welfare state in history has been enacted in the very cradle of the
welfare state – Germany, during the reign of social democratic party SPD, the party that
has historically been one of the most vocal proponents of welfare state, moreover in a
coalition with another left-leaning party, the Greens.
Previously, a centre-right coalition of CDU-CSU and FDP had been in power for
16 years. They too had been trying to substantially change the overburdened regime, but
the attempts ended unsuccessfully or resulted in only partial and cosmetic changes. The
reason for this failure was mainly a strong opposition in the Bundesrat, where the SPD
(then in opposition) held a majority since 1991, and the unwillingness of the labour unions
to concede any substantial changes.1
Paradoxically, it took a combination of government change and an overturn within
the new ruling party (SPD) itself for a breakthrough to be possible. In the background of
the decision-making was an increasingly unsustainable economic situation. Germany was
called the “sick man of Europe” because of its persistently high unemployment.2 At the
same time, it was facing additional challenges, such as reunification, globalization (mainly
in the form of cheap labour competition from other countries)3,a demographic change or
fiscal tightening in European Union, which increased the pressure even further. The result
was the Agenda 2010, a series of reforms, including a far-reaching pension reform of 2001
(so called Riester Rente),4 health-care reform,5 and perhaps most importantly the Hartz I-
1
Anke Hassel and Christof Schiller. Der Fall Hartz IV: Wie es zur Agenda 2010 kam und wie es weitergeht.
(Frankfurt: Campus Verlag, 2010), 84
2
Ibid.,17
3
Wolfgang Streeck and Christine Trampusch. “Economic reform and the political economy of the German
welfare state”,German Politics 14, No. 2 (2005): 175, https://doi.org/10.1080/09644000500154490
4
Hegelich, Simon et al. Agenda 2010: Strategien – Entscheidungen – Konsequenzen. (Wiesbaden: VS
Verlag, 2011), 25
1IV reforms, named after Pater Hartz, a former Volkswagen executive, whose commission
proposed these measures. The reforms have fundamentally changed the welfare state and
the labour market policy in Germany.
The first three Hartz packages focused largely on broadening and improving the
active labour market policies, such as income and start-up subsidies, training measures and
job creation schemes, as well as passive policies in the form of marginal deregulation of
temporary agency work and fixed-term contracts.6 The societal fuse, so to speak, was the
last implemented reform, Hartz IV. It signified a complete overhaul of the German welfare
state, which principally ended the income protection of the long-term unemployed with
decent previous employment record.7Hartz IV indeed proved to be unpopular. Protests
spread across the country, driven by constituencies usually supportive of SPD.8 The party
suffered a string of electoral defeats, first in several state elections in 2004, notably in
Hamburg9 and Saarland,10 and finally the federal Bundestag election in 2005.11
This thesis concentrates on the Hartz IV reform, specifically on its impact on the
labour market development, with special emphasis on unemployment reduction, which was
ultimately the main goal of all of the Hartz reforms, especially the long-term structural
component of unemployment. The post-Hartz years did indeed witness a dramatic decline
in unemployment, but the timing itself cannot ascertain causation. A thorough analysis is
needed.
Another question, which this thesis tries to answer, is whether the reforms lead to
an increase in poverty as a consequence of the welfare state overturn, which is probably the
main line of attack levelled against the reform by its opposers, and as such is worthy of
investigation. Christoph Butterwegge, the Linke-nominated candidate in a German
presidential election of 2017, calls Hartz IV “a deeply inhumane system, that
5
Pamela Camerra-Rowe. “Agenda 2010: Redefining German Social Democracy”. German Politics & Society
22, No. 1 (2004): 14, https://www.jstor.org/stable/23740498
6
Lena Jacobi and Jochen Kluve. “Before and after the Hartz reforms: The performance of active labour
market policy in Germany”,Journal for Labour Market Research 40, No. 1 (2007): 47,
https://www.econstor.eu/handle/10419/158652
7
Hassel and Schiller. Der Fall Hartz IV: Wie es zur Agenda 2010 kam und wie es weitergeht (Frankfurt:
Campus Verlag, 2010), 47
8
Christopher S. Allen. “The Road to 2005: The Policy of Economic Modernisation”,German Politics 15,
No.4 (2006):356, https://doi.org/10.1080/09644000601062477
9
Tagesschau, Hamburg state election 2004, https://www.tagesschau.de/wahl/archiv/2004-02-29-LT-DE-
HH/, accessed 25.04.2021
10
Tagesschau, Saarland state election 2004, https://www.tagesschau.de/wahl/archiv/2004-09-05-LT-DE-SL/,
accessed 25.04.2021
11
Tagesschau, Federal election 2005, https://www.tagesschau.de/wahl/archiv/2005-09-18-BT-DE/, accessed
25.04.2021
2disenfranchises, degrades and incapacitates”, in his no less dramatically titled book.12 The
DGB chairman, Michael Sommer labelled the Hartz reforms as “dismantling the welfare
state”.13 Such proclamations are obviously very inflammatory and it is therefore crucial to
ascertain their veracity.
The first chapter provides an overview of the Hartz IV reform that strives to be
thoroughly informative, though by no means exhaustive. The reader should be familiar
with the changes brought about by Hartz IV in order to create a mind-map that will be
useful for following the further investigation. Certain measures from the previous Hartz
reforms are described, as they create an important interplay with Hartz IV, notably the
mini-job reform that was a part of Hartz II.
Second chapter’s title “Post-Hartz labour market development” reveals the purpose
of the chapter. A descriptive analysis is used to illuminate the development of certain
labour market indicators, mainly unemployment (including the distinction between short-
term and long-term unemployment), as well as employment and the type and quality of the
newly added jobs, finishing with labour force participation. Dissection by age and gender
is usually provided, with occasional international comparison and contrast between East
and West Germany.
The third chapter represents the main body of this thesis. After analysing the labour
market development, the third chapter uses various tools to determine the causal link
between the Hartz IV reform and the so-called labour market miracle. These tools include
macroeconomic studies with both theoretical and quasi-experimental design, worker flow
analysis tracking the flows of workers to and from each labour market state, an
establishment survey, asking among other things about the change in willingness to make
concessions after the reform, and lastly, a comparison with and analysis of the plausibility
of competing arguments, which are provided by academics asserting that Hartz IV had no
significant role.
The last, fourth chapter, investigates the contention, that the reform brought about
significant increase in relative poverty and a degradation of the middle class. Many
findings from previous chapters are put to use together with additional analyses to reach a
verdict on this issue. The most important findings are summarized in the conclusion.
12
Christoph Butterwegge. Hartz IV und die Folgen: Auf dem Weg in eine andere Republik?. (Weinheim:
Beltz Juventa, 2018), 10
13
Streeck and Trampusch. “Economic reform and the political economy of the German welfare state”, 185
31 Reform Overview
This chapter offers an overview of the institutional setting of the welfare state
before and after the Hartz IV reform. Additionally, the mini-job reform, brought about by
Hartz II, is also described, as it forms an important interplay with Hartz IV and is tightly
linked to the poverty debate. Knowledge of the reforms is useful for understanding the
following chapters.
Before the Hartz IV reform, the unemployed could benefit from 3 broad pillars of
the welfare system. The most generous one was the unemployment benefit
(Arbeitslosengeld). The eligibility for receiving it was conditional on previous work in a
job subject to social security contribution for a specified amount of time. The amount
received from it was linked to the former income. The replacement rate (that is the amount
of money received compared to former net earnings) was subject to changes throughout the
years, but before the reform it stood at 60% for those without children and 67% for the
recipients with children.14 The standard duration of unemployment benefit was 12 months
if a worker had previously worked for at least 3 years. The duration minimum was 6
months for those with previous employment of 12 months, with every subsequent 4 months
of employment increasing the duration eligibility by 2 months.15 Conversely, older workers
enjoyed longer durations, depending on the specific age bracket and previous length of
employment, with maximum duration as high as 32 months for those aged 57 and over,
whom have worked for the previous 5 years in a contributing job.16
The second pillar was unemployment assistance (Arbeitslosenhilfe). After the
unemployment benefit duration expired, the now long-term unemployed were transitioned
to this pillar, which was also linked to previous earnings. The replacement rate was only
slightly lower than the unemployment benefits, 53 % for people without children and 57%
for those with children. The long-term rate in Germany was the most generous of all
14
Jens Alber and Jan Paul Heisig. “Do new labour activation policies work? A descriptive analysis of the
German Hartz reforms”,WZB Discussion Paper, No. SP I 2011-211 (2011):
15,https://www.econstor.eu/handle/10419/56791
15
Brendan Price. “The Duration and Wage Effects of Long-Term Unemployment Benefits: Evidence from
Germany’s Hartz IV Reform”. UC Davis, (2018): 6,
http://brendanprice.ucdavis.edu/uploads/1/1/2/4/112474025/price-brendan-hartz-20180310.pdf
16
Benjamin Hartung et al. “What Hides behind the German Labor Market Miracle? Unemployment Insurance
Reforms and Labor Market Dynamics”,IZA Discussion Paper, No. 12001, (2018): 48,
http://ftp.iza.org/dp12001.pdf
4European countries with the possible exception of Norway.17 The duration of this pillar
was unlimited, and the long-term unemployed could therefore enjoy often high benefits
without ever needing to find new employment. The combination of the generosity and no
time limit made this pillar unique in the whole Europe and provided strong disincentives to
job search. The black-yellow coalition of CDU-CSU and FDP tried to reform it in the
second half of 1990’s but could not find support from the left in the Bundesrat.18
One could work and still retain the assistance, as long as the work did not exceed
15 hours a week and any income exceeding 20% of the benefit was completely taxed away
(or 165 € in a case that the 20% were less than that).19
For those not eligible for the two above-mentioned benefits financed by the social
insurance system, there was the tax-funded mean-tested social assistance (Sozialhilfe). The
basic monthly rate (Regelsatz) for a single person amounted to 296 € in West Germany and
283 € in East Germany just before the reform. There were additional regular payments for
rent and heating, as well as special payments (Mehrbedarf) for children and other
dependent individuals. The old system also included irregular discretionary payments for
such occasions as refurbishments which according to estimates were equivalent to 18% of
the basic rate.20 The social assistance functioned as a safety net of last resort, so that
everyone could participate, as long as they proved that no other income or accumulated
wealth was sufficient to provide basic living conditions. Thus, even some low-earning
recipients of unemployment benefits and unemployment assistance could supplement their
income with social assistance.21 Working parallel to receiving the social assistance was
also allowed, but similarly to the unemployment assistance, the additional income from
work faced sharp marginal tax rate. The recipients could fully keep only the income equal
to 25% of the basic rate. Any earnings above that level were subject to 85% tax rate and
17
OECD, Net replacement rate in unemployment,https://stats.oecd.org/Index.aspx?DataSetCode=NRR,
accessed 21.01.2021
18
Hassel and Schiller. Der Fall Hartz IV: Wie es zur Agenda 2010 kam und wie es weitergeht. (Frankfurt:
Campus Verlag, 2010), 84-108
19
Wolfgang Franz et al. “Assessing the employment effects of the German welfare reform – an integrated
CGE- microsimulation approach”,Applied Economics 44, No. 19 (2012): 2406,
https://doi.org/10.1080/00036846.2011.564149
20
Ibid.
21
Alber and Heisig. “Do new labour activation policies work? A descriptive analysis of the German Hartz
reforms”, 16
5earnings above 50% of the basic rate were withdrawn entirely. 22 These conditions again
provided disincentives with regards to job-searching effort.
The post-reform change in unemployment benefits (the first pillar) was not
dramatic. The replacement rates of the newly called unemployment benefit I
(Arbeitslosengeld I) were the same, i.e., 60 and 67%, with a maximum benefit first set to
4250 € a month. This limit was increasing each year, being linked to the contribution
ceiling (Beitragsbemessungsgrenze) of the pension and unemployment insurance, same as
before the reform.23 The duration for most groups remained the same as well. The only
reduction affected older workers, for which the maximum duration was slashed to 18
months.24 This part of the reform took effect in January 2006, a year after the
implementation of the main part of Hartz IV. This measure was partially rolled back with a
reform in 2008, so that since January 2009, workers above 58 were granted 24 months of
unemployment benefits, conditional on having previously continuously worked for at least
4 years.25
The main change that Hartz IV has brought was merging of the two other separate
pillars, unemployment assistance and social assistance, into a so-called unemployment
benefit II (Arbeitslosenhilfe II) or shortly ALG II. The wage link dropped, the new system
was flat and means-tested. The basic rate started at 345 € for West Germany and 331 € for
the eastern counterpart. This seems like a noticeable improvement compared to the former
social assistance. However, the new system replaced the irregular discretionary payments
by increasing the basic rate, making the total income comparable.26 The rate is subject to
increase each year, reflecting the standard of living and price increases.27 In 2006, the basic
rate for East Germany was increased to match the West German level. 28 From then on, the
rates are universal for all Germany.
22
Franz et al. “Assessing the employment effects of the German welfare reform – an integrated CGE-
microsimulation approach”, 2406
23
Jacobi and Kluve. “Before and after the Hartz reforms: The performance of active labour market policy in
Germany”,47
24
Alber and Heisig. “Do new labour activation policies work? A descriptive analysis of the German Hartz
reforms”, 9
25
Georg Menz. “‘After Agenda 2010 is before the Elections’: Consolidation, Dissent, and the Politics of
German Labour Market Policy under the Grand Coalition”, German Politics 19, No. 3-4 (2010): 451,
https://doi.org/10.1080/09644008.2010.515833
26
Alber and Heisig. “Do new labour activation policies work? A descriptive analysis of the German Hartz
reforms”, 19
27
Statista, Basic rate development, https://de.statista.com/statistik/daten/studie/241114/umfrage/entwicklung-
des-hartz-iv-regelsatzes/, accessed 14.04.2021
28
Menz. “‘After Agenda 2010 is before the Elections’”, 451
6The deductions of income for those working while being on welfare are slightly
less severe post-reform. The gross earnings exceeding an amount of approximately 100 €
are marginally taxed at 80% up to 800€ and earnings between 800 and 1200 € at 90%.29
Any income earnings above that would be taxed away completely, but at that point it
would be more profitable for most recipients to leave the welfare for the job, anyway30.
The limitation imposing a maximum of 15 hours of work per week was lifted. Thus, the
new system is somewhat more accommodating towards the working welfare recipients.
Still, the reform is criticized for not being more radical in mitigating the disincentives
posed by the high marginal taxation for working welfare recipients.31
Hartz IV conceived a new definition of ability to work as being able to work at least
3 hours a day and used it as a criterion in determining the target welfare pillar, to which a
working-age person will be assigned.32 Thus, not only all of the unemployment assistance
recipients, but also a majority of the then social assistance recipients (90% of those in the
working age were defined as capable of work) were amalgamated into the ALG II pillar.33
While the recipients of social assistance were excluded from the access to active labour
market policy, these tools became available to those transferred into ALG II pillar after the
reform.34
Social assistance after Hartz IV has remained available to those individuals in
working age, which are not capable of working due to some kind of disability or because
of care responsibilities, and for old people in need of additional income. The benefit
payments are the same as for ALG II.35 Still, there are several differences between the two
pillars. First, the recipients of ALG II are under the obligation of being available to the
employment agency and participate in the process of job search. If the agency finds a
suitable work for the recipient and they decline to accept it, the recipient can be subject to
sanctions, which diminish the welfare receipt. This obviously does not hold for those
29
Franz et al. “Assessing the employment effects of the German welfare reform – an integrated CGE-
microsimulation approach”, 2407
30
Ibid., 2406
31
Ibid., 2407
32
Jacobi and Kluve. “Before and after the Hartz reforms: The performance of active labour market policy in
Germany”, 53
33
Hassel and Schiller. Der Fall Hartz IV: Wie es zur Agenda 2010 kam und wie es weitergeht. (Frankfurt:
Campus Verlag, 2010), 34
34
Ibid., 16
35
Alber and Heisig. “Do new labour activation policies work? A descriptive analysis of the German Hartz
reforms”,16
7supported by social assistance, who are receiving it precisely because they are unable to
work.
The sanction regime itself has become more important after the reform. While the
sanctions were available before, they were used only scarcely. In contrast, post-Hartz IV
they have become an important tool. A study found that on average almost 5% of
recipients received a sanction only between October 2006 and July 2007.36 The sanctions
take the form of percentual decrease of the benefits. Sanctions following mild
transgression cut the benefits by 10%. However, more severe infringements, like declining
a job offer or refusal to take part in a labour policy program, typically lead at first to a 30%
cut, doubling to 60% after a second transgression within the same year, and escalating as
high as towards a complete withdrawal of the benefits after third infringement.37 For
recipients under the age of 25, a 100% withdrawal can follow even after the first
infringement. Even mild non-compliances can lead to complete withdrawal, with 10%
increments adding up with each subsequent non-compliance.38
The sanctions gain even more importance in the light of toughening the criteria for
acceptable work (Zumutbare Arbeit). No work is deemed as unacceptable, unless it is
illegal, yields an immoral wage, or is incompatible with raising a child under 3 years of age
or caring for a dependent family member.39 The fact that an offered position pays
significantly less than previous employment or that it is outside of the field, for which a
person has education or training, is not a valid reason to decline the job offer anymore, in
the eyes of the law.
The second major difference between ALG II and social assistance is the source of
the payments. ALG II is paid by the social insurance system, specifically by the
unemployment insurance contributions, and is distributed by job centres, which are run
together by the Federal Employment Agency and municipalities, and is paid for from the
federal budget.40 Social assistance on the other hand is paid by the municipalities. This
distinction has important implications, since, as mentioned before, a majority of the former
36
Bernhard Boockmann et al. “Intensifying the use of benefit sanctions: an effective tool to increase
employment?”, IZA Journal of Labor Policy 21, No.3(2014), 11,
https://izajolp.springeropen.com/track/pdf/10.1186/2193-9004-3-21.pdf
37
Ibid., 3
38
Ibid.
39
Henry Goecke et al. “Zehn Jahre Agenda 2010: Eine empirische Bestandsaufnahme ihrer Wirkungen”,IW
policy paper, No. 7/2013 (2013): 30,
https://www.iwkoeln.de/fileadmin/publikationen/2013/110085/Agenda_2010_policy_paper.pdf
40
Hartz IV.org, Jobcenters, https://www.hartz4.org/jobcenter/, accessed 25.04.2021
8social assistance recipients have been transferred into the ALG II pillar, which has
alleviated the pressure on states and municipalities, whose budget is used to pay for the
social assistance both before and after reform.41 Lastly, the recipients of ALG II, in
contrast to social assistance recipients, are still inside the system of health-, pension- and
long-term care insurance.42
The system is even more complicated, however. The unemployed who are able to
work are not the only ones receiving the ALG II benefits. Another category are those
workers, whose income is so low, that it does not suffice to cover the necessary expenses.
Those employed recipients are called augmenters (Aufstocker), and their number grew
rapidly in the years after the reform, from around 880 000 at the time of the
implementation to 1.4 million in 2010. That year, they represented 29% of the number of
recipients capable of working.43 ALG II also covers those, who are able to work but are
exempted from the job-search obligations, mainly university students and those with
family care responsibilities.44 Another 1.8 million recipients were unable to work. This
should trigger a cognitive dissonance, since it was mentioned, that those unable to work are
covered by the social insurance pillar. However, this category is not unable to work
because of old age or disability. Over 90% of those unable to work but covered by ALG II
are children under the age of 15. They represented 28% of the total pool of ALG II
recipients in 2010.45
Although this thesis does not concentrate on Hartz I-III reforms per se, I will briefly
mention the mini-job reform that was part of the Hartz II package, since the interplay with
Hartz IV is important in later analysis.
The mini-jobs scheme itself already existed before the Hartz II reform. Jobs earning
up to 325 € a month and not exceeding the workload of 15 hours a week were tax- and
social-contribution free for the workers. The reform extended the limit to 400 € a month
and cancelled the 15-hour restraint. The employer tax on mini-jobs was increased from
22% to 25%.46 A later reform revised the parameters, so that since 2013 the limit is
41
Hassel and Schiller. Der Fall Hartz IV: Wie es zur Agenda 2010 kam und wie es weitergeht. (Frankfurt:
Campus Verlag, 2010), 85
42
Ibid, p.46
43
Alber and Heisig. “Do new labour activation policies work? A descriptive analysis of the German Hartz
reforms”, 20
44
Ibid., 23
45
Ibid.
46
Alisa Tathizdinova. “Increasing Hours Worked: MoonlightingResponses to a Large Tax Reform”, NBER
Working Paper, No. w27726 (2020): 9, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3679719
9extended to 450 € per month and mini-jobbers automatically become subject to pension
insurance contribution, from which they can be exempted upon application.47
In similar vein, the legislation also newly introduced so-called midi-jobs. They are
defined as jobs paying between 400 € and 800 € per month, with the earnings being subject
to slowly increasing social insurance contributions starting at 4% and reaching the standard
21% at the upper limit of 800 EUR.48 This scheme provides a much smoother transition
from a mini-job to regular employment and thus incentivises the workers more strongly to
seek a job improvement. As of 2013, the limit was extended to 850 € a month with the
aforementioned reform.49
Another important change brought about by the reform was dropping the tax and
social insurance payments even in the case that a mini-job was held as a secondary job in
addition to a regular employment.50 The moonlighters, as the people holding multiple jobs
are called, used to have their income pooled and had to pay income taxes and social
contributions on the combined sum. The additional income from the secondary mini-job
could easily have placed the worker into a higher income bracket and thus increasing the
marginal tax-rate. The fact that after the reform the secondary job is completely tax- and
contribution free (if the secondary-job income does not exceed 400 € a month) means that
the marginal tax rate for moonlighters decrease by between 19.5 to incredible 66
percentage points (the latter being the case, if the income from the main job has been high
and thus subject to high progressive tax).51 Thus, the reform obviously provided strong
incentives to take up a second job.
47
Federal Ministry of Labour and Social Affairs, 450 Euro mini jobs / marginal employment,
https://www.bmas.de/EN/Our-Topics/Social-Security/450-euro-mini-jobs-marginal-employment.html,
accessed 03.05.2021
48
Achim Kemmerling and Oliver Bruttel. “‘New politics’ in German labour market policy? The implications
of the recent Hartz reforms for the German welfare state”,West European Politics 29, No.1 (2006): 97,
https://doi.org/10.1080/01402380500389273
49
Federal Ministry of Labour and Social Affairs, 450 Euro mini jobs / marginal employment,
https://www.bmas.de/EN/Our-Topics/Social-Security/450-euro-mini-jobs-marginal-employment.html,
accessed 03.05.2021
50
Tathizdinova. “Increasing Hours Worked: MoonlightingResponses to a Large Tax Reform”, 3
51
Ibid.
102 Post-Hartz labour market development
This chapter provides a detailed analysis of the labour market development in
Germany at the beginning of the 21st century. Special focus is placed on aggregate
unemployment, employment, and labour force data as well as on more fine-grained
dissection by age groups, gender, type of employment and unemployment duration.
International comparison is occasionally provided for better context. This chapter builds a
necessary background and a starting point for the next chapter, which seeks causality
between the labour market developments and the Hartz reforms.
112.1 Unemployment
The first post-reform years were not kind to Hartz proponents. The reforms entered
into force at the same time as Germany was falling into a severe recession. The GDP
growth was negative in 2002 and 2003 and very anaemic for two years afterwards. 52 Not
surprisingly, the cyclical unemployment was rising. The most controversial one of the
reforms faced an additional challenge when it came to public opinion. The record high
unemployment of 5.3 million was reached in February 2005, two months after the
implementation of Hartz IV. In December 2004, the last pre-Hartz IV month, the number
stood just below 4.5 million.53 This unprecedented surge has left a very negative
impression in the public perception.
However, the change was largely a statistical artifact caused by the change in the
measurement.54 As mentioned before, with Hartz IV the definition of an unemployed
person has changed so that it covers anyone who is capable of working at least 3 hours a
day but is not currently working. Suddenly, many former social assistance recipients, that
had not been included in the statistics, were now transferred to the ALG II pillar and have
bloated the official unemployment numbers.55
Nevertheless, even after discarding this measurement change, Germany did not fare
well in comparison with other developed countries. OECD calculates a so-called
harmonized unemployment rate, which is standardized for international comparison. In
February 2005, the harmonized rate in Germany stood at 11.3%, which was the third
highest in European Union, with only Poland and Slovakia reporting worse numbers.56
Throughout 2005, even with the weak economic growth, the unemployment
situation improved, albeit slowly. There was a significant slump in employment and
corresponding hike in unemployment in a period between December 2005 and February
2006. This can be partially explained by seasonal effects. It is common that in the winter
months unemployment goes up. Many unemployment statistics are seasonally adjusted, so
52
Macrotrends, Germany GDP Growth Rate, https://www.macrotrends.net/countries/DEU/germany/gdp-
growth-rate, accessed 16.12.2020
53
Trading Economics, Unemployed Persons, https://tradingeconomics.com/germany/unemployed-persons,
accessed 16.12.2020
54
Holger Bonin. “The Two German Labour Market Miracles: Blueprints for Tackling the Unemployment
Crisis?”,Comparative Economic Studies 54, (2012): 787–807, https://doi.org/10.1057/ces.2012.39
55
Streeck and Trampusch. “Economic reform and the political economy of the German welfare state”, 186
56
Goecke et al. “Zehn Jahre Agenda 2010: Eine empirische Bestandsaufnahme ihrer Wirkungen”,5
12that they hide the volatile nature of unemployment caused by the seasonal patterns. They
may be a driver behind the discrepancies among various unemployment reports.
Nevertheless, the seasonal effects cannot fully explain the larger-than-normal German
unemployment spike during the winter 2005-2006, especially in an environment of a
starting economic boom.
The second part of the explanation is that the reform has produced a curious by-
product. The section of Hartz IV that has changed unemployment benefit duration for
elderly workers went into force in February 2006. For certain age groups it meant a change
of as much as 14 months (for example workers aged 57 and more were eligible for 32
months of unemployment benefit payments before the reform, which was shortened to 18
months afterwards). In anticipation of the reforms’ entry into force, many older workers
sought to become unemployed while the benefit duration was still calculated according to
the old law.57
Voluntary unemployment may seem as an implausible explanation, but it was a
common practice in Germany to use the long unemployment benefit period as a bridge
between work and (usually early) retirement. In 1984, an early retirement law
(Vorruhestandsgesetz) was adopted. Workers aged 58 or older could be sent to early
retirement, when the firm would pay at least 65% of the gross income until the age of 63 or
65, which is until the normal retirement age. Part of the burden could be taken over by the
Bundesanstalt für Arbeit (the predecessor of Bundesagentur für Arbeit), when the firm
would prove that they hired an unemployed person or someone just ending their
school/training in the older workers’ stead.58
Indeed, the evidence supports this anticipation effect. Whereas the unemployment
of most age groups showed only a mild increase due to the seasonal effect, the age groups
most affected by the unemployment benefit duration cut were also those with the most
significant unemployment spike. There is a useful discontinuity in the effect on benefit
duration change based on age, which supports this line of reasoning. The age brackets most
affected by the reform were not only those aged 57 and older, but also 52-54 years old. The
group in between - 55-56 years olds - was affected less. Correspondingly, the
57
Stephan Dlugosz et al. “Fixing the Leak: Unemployment Incidence Before and After the 2006 Reform of
Unemployment Benefits in Germany”,ZEW Discussion Paper, No. 09-079 (2009): 6,
ftp://ftp.zew.de/pub/zew-docs/dp/dp09079.pdf
58
Hassel and Schiller. Der Fall Hartz IV: Wie es zur Agenda 2010 kam und wie es weitergeht. (Frankfurt:
Campus Verlag, 2010), 64
13unemployment spike of 55- and 56-year-olds was less pronounced than that of both
surrounding age groups.59
The period between early 2006 and mid-2008 was marked by uninterrupted
unemployment decline, no doubt helped by the short-lived but intense economic boom.
The GDP growth in 2006 reached almost 4%60, a number not seen since the post-
reunification boom in the early 1990’s. But the employment boom of a magnitude
observed in this period should not be taken for granted even with the positive economic
growth. Many other countries in that period, as well as Germany in previous times, were
experiencing a phenomenon of a so-called “jobless growth”, meaning that the GDP growth
acceleration was followed only by a modest employment expansion. This surprising
development combined with later sustained improvement during most of the crisis and
afterwards suggests that a structural component of unemployment was declining alongside
the cyclical one.
Germany got into international spotlight during the global financial crisis. German
GDP fell 6,6% from its peak in the first quarter of 2008 to the trough only one year later, in
the first quarter of 2009.61 This fall of output was one of the worst in the developed world,
significantly higher than in the United States, where it totalled 4,1% from peak to trough.62
However, a completely different scenario occurred when examining the unemployment.
The German rate increased only marginally from 7.4% in late 2008 to 7.9% in early 200963
(slightly more if seasonally adjusted)64, whereas the USA registered a longer and steeper
rise from 4,5% in late 2007 to 10% at the turn of 2009/2010.65 The political crisis
management played definitely a significant role in the exceptional German labour market
results. However, there are many researchers claiming that the reforms were co-responsible
for the spectacular crisis performance. This claim will be part of the analysis in the next
chapter.
59
Dlugosz et al. “Fixing the Leak: Unemployment Incidence Before and After the 2006 Reform of
Unemployment Benefits in Germany”,18
60
Macrotrends, Germany GDP Growth Rate, https://www.macrotrends.net/countries/DEU/germany/gdp-
growth-rate, accessed 16.12.2020
61
Michael Burda and Jennifer Hunt. “What Explains the German Labor Market Miracle in the Great
Recession?”, Brookings Papers on Economic Activity 42, No.1 (2011): 273,
https://www.nber.org/papers/w17187
62
Ibid.
63
Ibid.
64
Trading Economics, Unemployment rate, https://tradingeconomics.com/germany/unemployment-rate,
accessed 12.02.2021
65
Bureau of Labor Statistics, USA unemployment rate, https://data.bls.gov/pdq/SurveyOutputServlet,
accessed 12.02.2021
14After the anomalous period of the crisis, the unemployment rate resumed a path of
a precipitous decline. In 2012, after years of global economic crises, the German
(harmonized) unemployment rate stood at 5,9%, the fourth lowest in EU, after Austria, the
Netherlands and Luxembourg.66 This unprecedented change in such a short amount of time
earned the label “labour market miracle”.
The drop in unemployment was more pronounced in East Germany compared to the
western counterpart. While in West Germany the number of unemployed dropped from
2.75 million in 2003 to 2 million in 2012, the change in the new states was a fall from 1.6
million to roughly 900 000 during the same time period.67 The choice of time frame is
important here. The West German decline in unemployment was almost finished by 2008,
whereas in the east the numbers continued to drop even afterwards. Remarkably, the
number of unemployed easterners declined slightly even during the most severe crisis year
2009, an achievement not seen in the rest of Germany.68Demographic factors were
probably at play in this matter. Firstly, the population in East Germany declined much
more rapidly in relative terms, so the number of the unemployed could partially track the
broad population trend. Besides the natality problem, the depopulation was also definitely
driven by a continuing trend of net migration to the western part of the country, especially
strong in case of students.69 Secondly, the generation, whose significant part lost jobs in
the reunification process and struggled with unemployment ever since, was gradually
retiring, and thus leaving official unemployment.70
The unemployment rate of women was roughly equal to the men’s rate during the
period 2005-2012. The proportion of unemployed women on the absolute amount of
unemployed remained largely unchanged during the same period and hovered around 46%,
this number being almost the same for both West and East Germany. 71 However, the
unemployment was more volatile for men during the crisis. This was largely due to the fact
that the fall in output was mostly concentrated in male-dominated manufacturing, while the
service sector, in which most women were employed, did not register a similar downfall.
66
Goecke et al. “Zehn Jahre Agenda 2010”, 5
67
Bundesagentur für Arbeit, Arbeitsmarkt 2012, 89
https://statistik.arbeitsagentur.de/Statistikdaten/Detail/201212/ama/heft-arbeitsmarkt/arbeitsmarkt-d-0-
pdf.pdf?__blob=publicationFile, Accessed 21.03.2021
68
Ibid.
69
Destatis, Net Migration between West and East Germany,
https://www.destatis.de/DE/Presse/Pressemitteilungen/2019/09/PD19_378_213.html, accessed 21.04.2021
70
Hilmar Schneider and Ulf Rinne. “The labor market in Germany, 2000–2016”,IZA World of Labor 379,
(2017): 3, https://doi.org/10.15185/izawol.379
71
Bundesagentur für Arbeit, Arbeitsmarkt 2012, 89
15There were 840 000 unemployed people over the age of 55 in 2002, a number
which decreased to 540 000 ten years later. For individuals over 50, the respective numbers
are 1.3 million and 900 000.72 In order to avoid unemployment, many older workers used
to accept early retirement, which was sponsored by the state. This subsidy was
discontinued at the beginning of 2010, however, leading to diminished incentives to take
up early retirement.73The number of early retirees also declined rapidly, by about 600 000
between 2000 and 2010.74 The unemployment of elderly is therefore not hidden among
early retirees.
The unemployment of young people under 25 years in 2012 was as low as 270 000,
which constituted about 5,9% unemployment rate for this age category. The ratio of youth
unemployment to elderly unemployment was only about 1,5:1, while some other
developed countries like Sweden reported ratio four times as high.75 It is worth reminding
that 2012 was a time soon after the global financial and economic crisis and during the
euro crisis. Many countries, especially those in southern Europe, struggled with youth
unemployment in excess of 20%, in worst cases even close to 60%, as in the case of
Greece.76
In Germany, the economic crisis affected mainly the exporting firms, where jobs
tend to require higher skill endowment. In contrast to the United States, where job
migration and flexibility is the standard, in the German model it is not unusual that (higher
skill) workers spend their whole career in one firm. This common practice minimizes the
hiring and training costs for firms, as they retain their talent for long periods of time.77
Thus, even in economic crisis, the firms try to avoid labour force shedding if possible.
High-skilled labour all over the world suffers lower risk of unemployment, this holds even
more true in the German model. The consumption sector on the other hand contains mainly
low-skilled workers and is therefore more vulnerable to economic downturns.
72
Goecke et al. “Zehn Jahre Agenda 2010”, 7
73
Lindecke et al. “Altersteilzeit”, Hans Böckler Stiftung Arbeitspapier, No.142 (2007), 7,
https://www.boeckler.de/pdf/p_arbp_142.pdf
74
Goecke et al. “Zehn Jahre Agenda 2010”, 8
75
Ibid.
76
Statista, Youth unemployment in Greece, https://www.statista.com/statistics/812053/youth-unemployment-
rate-in-
greece/#:~:text=Youth%20unemployment%20rate%20in%20Greece%20in%202020&text=The%20statistic
%20shows%20the%20youth,Greece%20was%20at%2032.51%20percent, accessed 20.12.2020
77
Alexander Reisenbichler and Kimberly J. Morgan. “From“Sick Man” to “Miracle”: Explaining the
Robustness of the German Labor Market During and After the Financial Crisis 2008-09”,Conference
Paper:American Political Science Association Annual Meeting, Seattle, (2011): 5,
https://doi.org/10.1177/0032329212461616
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