A brief note on Hartz Reforms

1. Economic Situation and Labour Market Institutions before Hartz

Since the 1990s, Germany has shown to be unable to benefit from
favourable conditions in the global economy. From 1991 until 2003 GDP
grew by only 18%, which is half the growth of the United Kingdom (35%)
or the Netherlands (34%) during that period. Employment even slightly
decreased (by 0.4%) and unemployment rates were higher than ever,
ranging between 9.6% in the West and 18.6% in the East.
Certainly the unification in 1990 and its repercussions had contributed to
Germanys poor performance. Unification suddenly increased the labour
force by roughly one third of workers, a large share of which was
inadequately trained for immediate employment in an open market
economy. Despite the need to first retrain the labour force and reshape the
formerly centrally planned economy, however, it was a core political
objective to adjust East German wages to the comparatively high West
German levels as quickly as possible. In contrast to other Central and
Eastern European transition countries having competitive wages levels to
create sustainable growth, the East German economy experienced rising
unemployment and continuing dependence on federal subsidies and
transfer payments from West to East. Apart from the high fiscal costs of
unification, the Maastricht criteria reduced the governments scope for
expansive growth policies further.
Only a small share of overall German unemployment is thought to be
attributable to business cycle factors. Some studies argue that the
German NAIRU has increased over the past decades (e.g. Franz 2001),
indicating that structural factors play an important role in the German
unemployment problem.
The set-up of labour market policy in Germany during the 1990s can be
characterised as follows: From the very beginning, unemployment benefits
were meant to maintain the workers social status during unemployment
rather than providing a safety net of last resort. All payments made to the
individual over the entire period of unemployment were linked to his or her
previous earnings. Unemployment benefits were paid for the first 6 to 32
months of unemployment (depending on previous employment duration
and age) and amounted to 67% of the last net income (60% without
children), with a maximum level of 4 250 marks per month.
Unemployment assistance, which was paid thereafter without time limit,
still reached 57% (53%) of the last net income. The unlimited duration of
unemployment benefit payments was an extraordinary feature of the
German unemployment benefit system, leading to replacement rates for
long term unemployed which were higher than in any other OECD country
(OECD 2004). Unemployment benefits were financed by unemployment
insurance contributions shared by employers and employees, while
unemployment assistance was financed by taxes. In principle,
unemployment assistance was means-tested on a yearly base. It was
possible to complement unemployment insurance by tax-financed social
assistance. Generally, every household whose income fell below a certain
income threshold qualified for social assistance. The German benefit
system combined generous benefit levels with high benefit reduction rates
that taxed away most of the additional earned income of a benefit

recipient. Thus, incentives to take up a job were very low, especially for
low skilled workers. Engels (2001) calculates that a typical family with
three children receiving social assistance in West Germany in the year
2000 received an income that was only 15.3% below the income of a
comparable family with a single earner receiving an average unskilled
workers wage. In East Germany the respective difference was only 11.5%.
2. Hartz reforms
The Hartz concept, also known as Hartz reforms or the Hartz plan, is a
set of supply side recommendations submitted by a commission on
reforms to the German labour market in 2002. Named after the head of
the commission, Peter Hartz, these recommendations went on to become
part of the German government's Agenda 2010 series of reforms, known
as Hartz I-Hartz IV. The committee devised thirteen "innovation modules",
which recommended changes to the German labour market system. The
first three parts of the reform package, Hartz I-III, were mainly concerned
with creating new types of employment opportunities (Hartz I), introducing
additional wage subsidies (Hartz II), and restructuring the Federal
Employment Agency (Hartz III). The final part, Hartz IV, was implemented
in 2005 and resulted in a significant cut in the unemployment benefits for
the long-term unemployed.
The "Hartz Committee" was founded on February 22, 2002, by the federal
government of Germany led then by Gerhard Schrder. Its official name
was Kommission
fr
moderne
Dienstleistungen
am
Arbeitsmarkt (Committee for Modern Services in the Labour Market). The
15-member committee was chaired by Peter Hartz, then Volkswagen's
personnel director.
Cornerstones of the Hartz Reforms (
)
(a) Increasing effectiveness and efficiency of labour market services and
policy measures Re-organisation of local employment agencies
Introduction of quasi markets Improved targeting Evaluation mandate
(b) Activating the unemployed Re-Organisation of the benefit system
Sanctions New policy mix with priority to measures requiring proactive
behaviour of the unemployed Make work pay
(c) Fostering employment demand by labour market deregulation
Deregulation of the temporary work sector Exemptions from restrictions
on fix-term contracts Exemptions from restrictions on dismissal
protection
Summary of Hartz I reforms :
"Staff Services agencies" (Personal-Service-Agentur or PSAs) were
established all over Germany and these operated as temp agencies to
place unemployed people with employers. A voucher programme for
vocational education was introduced to replace the previous contracting
out scheme. This allowed those selected to choose within an area of
training decided by their caseworker. Subsistence payments began to
vary according to an individuals ability to work as well as their previous
contribution record. Requirement for companies to register when they
make a worker unemployed or for the employee when they resign to give
them notice so job search can begin. Requirement to take up

reasonable offers of employment or provide a valid excuse burden of

proof transferred to the unemployed to state why the offer is not
reasonable and not the caseworker to explain why it is attractive. Reform
of the law on Temporary Employment and Labour to end the ban on
renewing temporary work contracts with new temporary work contracts.
Summary of Hartz II reforms:
New types of employment, "Minijob" and "Midijob" were created. These
were short-term and part-time roles with higher thresholds for taxes and
social insurance payments for employees and less worker protection to
encourage employers to hire. A grant for entrepreneurs, known as the
"Ich-AG" (Me, Inc.) was introduced, to encourage them to start a business
and tackle the existence of undeclared employment. A rise in the number
of job centres (their name was changed from labour offices) and an
emphasis on them becoming one stop shops combining job search and
welfare roles.
Hartz III Reforms - summary of proposals:
FLO renamed the Federal Employment Agency (FEA). Ratio of case
managers to beneficiaries was lowered, FEA embraced internet and
renamed an agency with clients. Provision to allow a 30% benefit cut if
a person on unemployment benefits refused to take up a reasonable offer
of work. Merged job creation and structural adjustment measures into
one scheme and reduced the maximum duration. Access to
unemployment insurance benefit was tightened, with the minimum prior
contribution period changed to 12 months in the previous two years
compared with 12 months in the previous three years formerly.
Hartz IV Reforms - summary of proposals:
Unemployment benefits and welfare benefits were combined into one
single lower payment entitled Unemployment Benefit II. Previously
unemployed German workers could get half their previous salary in
benefits while they were out of work indefinitely, could turn down jobs that
did not match their specifications or that required a change of location.
Those never employed immediately went on to this scheme; those
previously employed receive benefits linked to their previous wage for a
period up to two years and then went on Hartz IV. Individuals with savings
in excess of 13,000 had to exhaust the excess before they could receive
Hartz IV benefits. To receive payment the claimant must sign a contract.
This outlined what they were obliged to do to improve their job situation
and the help the state agreed to provide. The claimant could be required
to take any type of legal job or face reduction or elimination of benefits.
The Labour Office authorised to conduct unannounced inspections to
check for the presence of other adults at the claimants abode or other
signs of unreported earnings to ensure correct welfare benefits payments.
The administrative work of the Federal unemployment office and local
welfare offices were combined. The Federal Labour Agency had
responsibility for the new Unemployment Benefit II. A new programme for
getting the unemployed into nonprivate work sector was introduced.
Known as one-euro jobs, they paid 1 an hour for work in the public
interest and the recipient kept their Unemployment Benefit II.

More on Mini-jobs, midi-jobs, and one-euro-jobs

Mini-jobs and midi-jobs refer to low-wage employment contracts for a
small number of hours worked. Mini-jobs existed before the Hartz laws;
Hartz II raised the monthly salary cap from 325 to 400, and created a
higher level, called midijobs, which were capped at 800.a Mini-jobs are
subject to employee social insurance contributions at a reduced or zero
rate. Employer contributions for jobs earning less than 400 a month are
higher than for a "normal" job, coming to approximately 28% instead of
the roughly 20% standard rate for employers. Workers in mini-jobs are not
entitled to unemployment insurance benefit, and pension benefits are
optional in that workers may opt to pay a pension contribution at a
reduced 4.9% rate, which gives them pension rights similar to the
standard contributions. A mini-job does not in itself entitle the worker to
health insurance insofar as the employer does not pay health insurance
contributions. The individual may nevertheless be entitled to health
insurance if it is provided under another activity, or if covered through a
family member. Midi-jobs are subject to lower social insurance
contributions, which gradually rise to the standard rate when monthly
earnings reach 850. Workers in midi-jobs are entitled on the whole to the
same benefits as employees subject to social insurance contributions at
the full rate. Since 2004, there has been considerable growth in mini- and
midi-jobs, and in one-euro-jobs (a workfare arrangement in the non-private
sector established by Hartz IV, under which the claimant continues to
receive benefits, in addition to payment of at least one euro an hour for
work in the public interest): The numbers working in mini-jobs on top of
other paid work (who are already counted in the employment figures
because of their main job) have grown sharply, by 840,000 persons, rising
from 1.69 million in 2004 to 2.53 million in 2011; on the other hand, those
working only in a mini-job increased by just 81,000 between 2004 and
2011 (to 4.9 million, 66 percent of whom are women); The number in midijobs rose from 1.19 million in 2007 to 1.37 million in 2011 (74 percent of
whom are women); In 2005, their first full year of existence, there were
over 200,000 in ein-euro-jobs, which continued to pick up through 2009,
when they exceeded 320,000 jobs, before declining sharply in 2011, to
188,000
3. Philosophy and scope of the programme
The law's underlying concept, sanction and support, has worked in other
countries as well. It cuts benefits for those not willing to work, but should
help others to find jobs more quickly. The long-term unemployed have
been taken care of by two branches of the welfare state. If you never
worked, your city paid means-tested welfare. If you had a job for long
enough, the Federal Employment Agency paid unemployment aid for life,
at a rate just over half of previous net income. But this gave little incentive
to look for legal work. So the government is merging the two benefits into
a single, means-tested benefit for all long-term unemployed.
4. Evaluation and criticism
Dustmann, Fitzenberger, Schnberg and Spitz-Oener 2014) argue that:

The astonishing transformation of the German economy is due to an

unprecedented process of decentralisation of wage bargaining that
led to a dramatic decline in unit labour costs and ultimately to an
increase in competitiveness of the German economy.

The process of wage decentralisation was made possible by the

specific governance structure and autonomy of the German labourmarket institutions ( 11-19), not rooted in legislation, but
laid out in contracts and mutual agreements between employer
associations, work councils, and trade unions.
The 2002-05 Hartz reforms played no essential role.

An unpopular success
Between 2005 and 2008 the unemployment rate fell from almost 11% to
7.5%, barely increased during the Great Recession, and then continued its
downward trend reaching 5.5% at the end of 2012. This view is shared by
many economists in Germany and confirmed in our recent macroeconomic
study of the Hartz reforms based on a calibrated search model (Krebs and
Scheffel 2013). Specifically, we find that the Hartz IV reform reduced the
non-cyclical unemployment rate in Germany by 1.4 percentage points. We
further find that the Hartz I-III reforms decreased the non-cyclical
unemployment rate in Germany by 1.5 percentage points. Thus, our
analysis suggests that the entire reform package let to a permanent
reduction in the German unemployment rate by almost 3 percentage
points!
Most economists are probably not surprised to hear that a policy reform
that dramatically cuts unemployment benefits and improves a very
inefficient matching process will reduce the unemployment rate
substantially. Perhaps more surprising is that despite their apparent
success, the Hartz reforms have always been very unpopular among the
German public. This unpopularity has been documented in surveys, but
the best evidence comes from the upcoming National Election in Germany
to be held on 22 September 2013. There is no major party that dares to
run on a platform that openly endorses the Hartz reforms. Indeed, several
parties are trying to win votes by promising to roll back the Hartz reforms,
including the Social Democrats who initiated the reforms in 2003-2005
under the leadership of Chancellor Gerhard Schroeder.
Winners and losers
Hartz IV resulted in a significant cut in the unemployment benefits for the
long-term unemployed, and this group therefore experienced a welfare
loss. Most interestingly, the short-term unemployed also lost even though
Hartz IV did not reduce their unemployment benefits, but the prospect of
less insurance in the case of becoming long-term unemployed is enough
to make them resist the reform. Finally, low-skilled workers with precarious
jobs are in a similar position as the short-term unemployed and many of
them are likely to lose as well. Indeed, our study suggests that the Hartz IV
reform reduced real wages, a prediction that is consistent with the data
see the evolution of the real wage in Germany depicted in figure 2.
The welfare losses experienced by unemployed workers and workers with
precarious jobs provide a simple explanation of the unpopularity of the
Hartz reforms, and in particular Hartz IV. However, even if the reform
losers are not the majority, it can well be that unions and politicians will
support their concerns by promising to roll back the reforms. For example,
if the reform losers are a clearly defined group with individually large and

sometimes dramatic losses, but the reform winners are a diffuse group
with only small and indirect gains for each individual, then a rational
politician interested in winning elections will run on a platform that calls
for reversing the reforms or not implementing them in the first place.
The results of the Hartz laws can be seen in countless statistics. Just 29
million of Germanys nearly 42 million workers have jobs with full social
benefits. Some 5.5 million men and women work part time, and 4.1 million
earn less than 7 an hour. There are 4.5 million people dependent on
Hartz IV, including 1.4 million who have work but still cannot earn enough
to cover their living expenses.
The low-wage sector in turn serves as a lever to drive down wages in the
rest of the economy. In the last decade, increases in unit labour costs in
Germany have been minimal; the country is at the bottom of European
tables in this respect.
Business associations, the media and leading political parties have
celebrated the Hartz reforms as a great success. In the Bild newspaper
former Chancellor Schrder called the measures a net benefit to society
which had paid off for our country.
If by our country one understands the richest 10 percent of German
society, then Schrder is right. They have profited enormously. Here, too,
the statistics speak for themselves. In 2008 the income of the wealthiest
10 percent was eight times higher than that of the poorest 10 percent.
This figure has increased in the past four years since the onset of the
economic crisis. In the 1990s, this ratio stood at six to one.
In 2010, 924,000 millionaires lived in Germany alongside 4.5 million Hartz
IV recipients. The total is now expected to top 1 million.
The Hartz measures and the attendant Agenda 2010 introduced by the
SPD and Greens represented an onslaught on the German welfare state
that no conservative government had achieved. These reforms were
only possible due to the active support of the unions.
Peter Hartz himself is unable to enjoy his success. In 2007 he was
sentenced to two years imprisonment on probation and a hefty fine and is
now shunned by society. Hartz was involved in a bribery scandal involving
trade union representatives at Volkswagen which was so manifest that
even the German judiciary eventually felt compelled to act.
The microeconomic evaluations of the Hartz reforms have shown that
enhanced guidance for jobseekers, and government-sponsored working
arrangements in the private sector, have significantly contributed to the
return to employment. Hartz III and IV doubled the average time a
counsellor devoted to each unemployed person between 2004 and 2009.
This accelerated their return to employment, leading to savings that
exceeded the additional outlays, according to the Evaluation Report on the
Hartz
IV
reform.
Integration
grants
for
private-sector
jobs
(Eingliederungszuschsse) also had a major impact on getting people back
to work, at an individual level; Bernhard et al found that long-term
unemployed persons who benefited from this type of contract, that runs
from 4 to 6 months, have a 70% probability of being in employment
twenty months after starting in the programme, compared with only 30%
for jobseekers with similar characteristics but who were not covered by the
programme. However, while the impact was significant for individuals, the
figures doubtless obscure any windfall effects for employers (who would

have hired without the grant) and deplacement effects (absent the grant,
the employer would have hired someone else). In-company training
programs (betriebliche Trainingsmassnahmen) and self-employed start-up
grants (Grndungszuschsse) also had a major impact on leaving the
benefits system: Jozwiak and Wolff estimate that in-company training
raised the probability of leaving the benefits system by 13 to 19
percentage points, depending on the sub-populations considered; these
values were attained rapidly and were relatively stable over time.
Nivorozhkin and Wolff estimate the effect of self-employed start-up grants
to be 20 percentage points on average, twenty months after entering the
programme. The continuing vocational education and training measures
(Frderung der beruflichen Weiterbildung) can have a significant effect (up
to 13 percentage points) but it becomes apparent on average only two
and a half years after starting the programme (Bernhard and Kruppe). On
the other hand, using private placement agencies, short training
programmes (e.g., writing a CV, preparing a job interview, or setting up a
company), and the eineuro-jobs have had disappointing effects (Bernhard
and Wolff; Wolff and Jozwiak; Hohmeyer and Wolff). This could be
explained by shortcomings in how the schemes are targeted. The schemes
were found to have a high positive impact for harder-to-place individuals
(older workers, persons without qualifications, immigrants, those
unemployed for over two years, and Eastern Germans); persons steered
into the programmes are not generally those for whom they could have a
significant positive effect (Huber et al.) Finally, the Evaluation Report on
Hartz I to III submitted to the federal legislature in February 2006
recommended the termination of the temporary agencies (Personal
Service Agenturen, or PSAs) set up under the public employment service
agencies. Despite their high cost, the PSAs failed to speed up the return to
employment.
This paper quantifies the impact of the Hartz reforms on matching
efficiency, using monthly SOEP gross worker flows (1983-2009). We show
that, until the early 2000s, close to 60% of changes in the unemployment
rate are due to changes in the inflow rate (job separation). On the
contrary, since the implementation of the reforms in the mid-2000s, the
importance of the outflow rate (job finding) has been steadily increasing.
This indicates that matching efficiency has improved substantially in
recent years. Results from an estimated matching function pointing to
efficiency gains of more than 20% corroborate this finding.
Macroeconomic evaluations of the Hartz reforms generally find a
significant impact on reducing structural unemployment and increasing
labour market participation. Published research indicates that the reforms
have had positive effects on the German labour market. Hertweck and
Sigrist find an improvement in matching labour market supply and
demand. Since 2005, they claim, unemployment inflows explain only half
the changes in the unemployment rate, down from 60% through the start
of the 2000s. This indicates both an increase in unemployment outflows,
and less cyclicality in job losses. This analysis is corroborated by both Fahr
and Sunde, and Klinger and Rothe. Estimating labour market matching
functions, they indicate that Hartz I, II and III accelerated the worker
reallocation process by reducing the average unemployment duration by
roughly 20 percent. According to Fahr and Sunde, the impact is stronger in
manufacturing; and the reorganisation of the public employment service

agency (Hartz III) increases the positive effects of Hartz I and II. Klinger
and Rothe report that the Hartz reforms have benefited long-term
unemployed persons more than the short-term unemployed: now, being
unemployed for more than one year has less of a negative impact on
returning to work than before the reforms. They also find that the positive
impact on the labour market continued to gain momentum during the
crisis, thus contributing to the near-stability of employment during the
period (see Part 5, below). Finally, the Hartz IV reforms of the
unemployment benefit system increased incentives to work. The survey by
Kettner and Rebien found that unemployed persons increased their
jobseeking activity (e.g., unsolicited job applications) and made greater
wage concessions during job interviews.7 However, changes in
unemployment registration behaviour arising from the reform make it
difficult to assess Hartz IV. The only available studies are based on ex-ante
simulations that suggest the effects on employment would be positive, but
of a relatively uncertain size. According to the microsimulation model in
Franz et al., the labour supply changes arising from Hartz IV could lead to
the creation of an additional 45,000 jobs, after taking macroeconomic
feedback effects into account. An international comparison of the
generosity of transfers to the unemployed, the OECD considered that the
reform would have far greater effects, in that it should lower the structural
unemployment rate by around one half of a percentage point. Finally,
Krebs and Scheller, using an incomplete market model with search
unemployment calibrated to German data, estimate that the reform has
reduced the long-run (noncyclical) unemployment rate in Germany by 1.4
percentage points
Increased income inequality
These roles, along with reduced benefits and sanctions, have significantly
increased income inequality in Germany, even though they reduced
unemployment. An OECD report in April 2012 found that: Germany is the
only [EU] country that has seen an increase in labour earnings inequality
from the mid-1990s to the end 2000s driven by increasing inequality in the
bottom half of the distribution. They attributed the wage moderation to
a weakening in trade unions and a set of reforms in 2003 meant to
increase the flexibility of the labour market. A more profound reason for
the increase in income inequality is that individuals formerly paid a high
level of benefit linked to their former wage for being unemployed, now
received means-tested, low-value benefits and were expected to work in
low-remunerated roles to maintain their right to these benefits.
Over the years, certain elements of the Hartz reforms have fallen foul of
the constitution and its celebrated opening line "human dignity is
inviolable". The German state is obliged to guarantee its citizens a life
compatible with "human dignity," a principle that resulted in a 2010 court
ruling that said the standard Hartz IV payment is not calculated in a way
that ensures that. In April 2012, a Berlin court decided that the monthly
Hartz IV payment was exactly 36 too little (or 100 for a family) to
comply with constitutional requirements. That is not yet, and probably
won't ever be, enough to overthrow the entire Hartz concept, but the
conflict with the "pressure to work" ideology is growing more apparent.
Reduction in real wages in Germany was not achieved through high
inflation: the German inflation rate was consistently below the euro

average rate and barely exceeded 2% throughout the period. One

commentator has claimed that this wage restraint caused low inflation,
which meant that: Germanys so-called real effective exchange rate
within the eurozone fell by 17 per cent between the beginning of 1999 and
the third quarter of 2011, making its exports much more price
competitive. Over the same period, Frances real 6 effective exchange rate
rose by 4.4 per cent. Germanys internal devaluation contributed to a big
divergence in the two countries relative trade positions. Whereas ten
years ago France and Germany both had small current account surpluses,
France is now running a deficit of around 3 per cent of GDP, while
Germany is running a surplus of 6 per cent [as of 2011].
Who won and who lost from the reforms?
IMF analysis of the Hartz IV reforms found that: employed households
gained as the output gains outweighed the welfare loss due to the
reduction in unemployment insurance. This gain was equal to an increase
of around 0.3 % of lifetime consumption.; the long-term unemployed
suffered a loss equivalent to 1% of their lifetime consumption; the shortterm unemployed also suffered a welfare loss but their welfare loss is
significantly smaller than the welfare loss of the long-term unemployed.
the reforms lead to an expansion in output and a decline in real wages,
but the wage effect were relatively mild.; the rate at which the
unemployed found jobs, which had been stable before the Hartz Reforms,
afterwards began to increase steadily until the year 2007, at which stage
they remained relatively stable at a significantly higher level.
Similarly, the OECD has found that: the incidence of long-term
unemployment dropped from 56.4% in 2006 to 45.5% in 2009; around half
of benefit recipients experienced a decline in benefits, but one-third had
their level of benefits increased.
http://www.astrid-online.it/--il-lavor/Studi-ric/Akyol_Neugart_Pichler_EconAffaires_1_2013.pdf (
)
http://repec.rwi-essen.de/files/DP_06_041.pdf (
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