Hartz-Reforms

LOW GERMAN UNEMPLOYMENT THE RESULT OF KEY LABOUR MARKET REFORMS

Germany’s low unemployment is in large part due to the ‘Hartz Reforms’, which started as early as 2003 and have reduced the long-run rate of unemployment by 1.1%. That is the central finding of research by Matthias Hertweck and Oliver Sigrist, presented at the Royal Economic Society’s 2013 annual conference.

Unemployment rates across much of Europe have surged to unprecedented levels in recent years, particularly among the southern countries. In contrast, German unemployment has continued to fall even during the Great Recession. The authors conclude:

‘Our results build a solid basis for the macroeconomic effectiveness of such labour market reforms. This is particularly important for policy-makers across Europe who are currently planning to undertake similar structural reforms.’

The study looks at the effect of the so-called ‘Hartz Reforms’, which aimed to increase the chances of employers finding good workers and worker finding good jobs. They did this by reforming the way that unemployed people receive help in finding a job into a way that treated unemployed people more as clients at an agency.

The study breaks down the changes in the German unemployment rate into two parts – the inflow rate (unemployment rising due to job losses) and the outflow rate (unemployment falling due to people finding jobs) – and examines whether the relative contributions are stable over time.

The study shows that until the early 2000s, close to 60% of changes in the unemployment rate are due to changes in the inflow rate, as is often the case. But since the Hartz Reforms, the importance of the outflow rate has been steadily increasing, indicating a substantial improvement in helping people find jobs.

The study finds that the effect is a fall in Germany’s long-run unemployment level – that which is compatible with stable inflation – of 1.1%. The study also models the improvements in ‘matching efficiency’ – helping unemployed people find work – and finds gains of more than 20%.

More…

Following the financial crisis, unemployment rates across most European countries surged to unprecedented levels, particularly in the southern periphery. In contrast, the trend of the German unemployment rate continued to fall even during the Great Recession. This development, which started in the year 2005, is often attributed, at least in part, to the so-called ‘Hartz reforms’.

This study shows that the reforms – implemented by the German government in the years 2003-05 – have indeed contributed significantly to the extremely favourable performance of the German labour market in recent years. The estimates point to a reduction in the long run unemployment rate of at least 1.1 percentage points. This result is of great importance for policy-makers across Europe who are currently planning to undertake similar structural reforms.

The Hartz reforms aimed at increasing the efficiency of the job matching process – that is, a higher number of new job matches at a given ratio of vacancies to unemployment, by stimulating the search effort of the unemployed and by reorganising the Federal Employment Agency into a customer-orientated service provider. Despite the good reputation of the Hartz reforms among policy advisers, scientific evidence on its macroeconomic effectiveness remains inconclusive and mixed.

This study quantifies the macroeconomic effectiveness of the Hartz reforms using long time series on aggregate labour market transition rates. In particular, it tests the hypothesis of higher matching efficiency in the post-Hartz period on two different grounds.

First, the researchers decompose the fluctuations of the German unemployment rate into changes in the two underlying channels – the inflow rate (job separation) and the outflow rate (job finding) – and examine whether the relative contributions are stable over time. They show that, until the early 2000s, close to 60% of changes in the unemployment rate are due to changes in the inflow rate. This finding corroborates previous findings that the German labour market suffers from a low degree of matching efficiency.

Furthermore, the study provides evidence that the dominance of inflows over outflows is a very robust feature across all demographic subsamples but the young. Since the implementation of the Hartz reforms, however, the importance of the outflow rate has been steadily increasing, indicating a substantial improvement in matching efficiency.

Second, the researchers quantify these effects by estimating an empirical matching function, where they allow for a structural break around the year 2003. The estimates – which are robust across various specifications – point to efficiency gains of more than 20%.

The Hartz Reforms in Germany have accelerated the job matching process significantly. At the lower bound of the estimations, they reduce the long-run unemployment rate by 1.1 percentage points. Thus, the results build a solid basis for the macroeconomic effectiveness of such labour market reforms. This is particularly interesting for policy-makers across European countries who are currently planning to undertake similar structural reforms.

ENDS


Contact:

Matthias Hertweck: (matthias.hertweck@uni-konstanz.de)

Oliver Sigrist: +41 76 414 2752 (oliver.sigrist@unibas.ch)

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

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