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.