Germany vs US / The Hartz reforms and Obama

The origins of Germany’s labor-market turnaround dates back to the mid-1990s, when its ruling class decided that things could not continue to go on this way.  A humiliated Germany, of “Wirtschaftswunder” fame, had joined the rest of Europe in recording double digit unemployment rates, peaking at 13 percent in early 2005.  The fabled German engineering machine was sputtering and needed new life.

Chancellor Gerhard Schroeder called for labor market reforms in his 1995 “Agenda 2010.”  He appointed a reform commission, headed by Peter Hartz, the head of personnel at Volkswagen. Hartz and his fellow commissioners were ordered to devise a plan for reducing unemployment and restoring German competitiveness.

Unlike the United States where grand bargains are talked about and then forgotten, the Hartz reforms were actually implemented first by Schroeder and then by his successor Angela Merkel of the rival Christian Democrat Party.

The fourth and final phase of the Hartz reforms went into effect in 2005 under Merkel. Within less than a decade, Germany halved its unemployment rate, while the rest of the Euro Zone remained stuck with double-digit unemployment.

Prior to “Hartz IV” – as the Germans call it — Germany was noted for its generosity to those without jobs. Unemployment benefits preserved as much of former earnings as possible. Unemployed workers could turn down jobs that did not correspond to their specific qualifications without losing benefits. (Taxi drivers could refuse jobs as truck drivers). The unemployed could refuse jobs that required a change of location. Unemployed workers received unemployment checks alongside generous welfare benefits. The unemployed even received money for their vacations.

“Hartz IV” turned Germany from one of the most generous welfare and unemployment systems into one of the stingiest.

Workers who lose their jobs receive unemployment benefits based on their previous earnings and time on the job for six months to two years. Once unemployed workers exhaust their regular unemployment benefits, they enter the Hartz IV program. (Germans use “Hartz IV” to describe the long-term unemployed who are in the program, often derisively, as well as the program itself.)  If you have never been employed, such as a graduating student, you go immediately into the Hartz IV program.

Hartz IV recipients receive about $400 per month for living expenses. Their rent and health insurance are paid directly by the state, subject to limitations on square meters of living space. If a “Hartz IV” turns down job offers, he or she stand to lose part or all their benefits. In addition to the $220 per month of “children’s money” that all families receive, a “Hartz IV” receives a monthly supplement of about $130 per child.  With these benefits, a single unemployed woman with one child has less than $750 per month for expenses, after the state directly pays her rent and health insurance.

Unlike other unemployment insurance programs, the Labor Office (renamed the “Jobs Center”) considers the Hartz IV recipient’s “need community” (Bedarfsgemeinschaft in bureaucratic German).  A spouse or a partner with earnings reduces benefits according to a published formula. A recipient sharing a common refrigerator also can experience reduced benefits because basic needs are being met by others. Hartz IV recipients must go through a complicated bureaucratic procedure to replace essential household items such as a refrigerator or television set. The Labor Office conducts unannounced inspections to check for the presence of other adults or other signs of unreported earnings…

The American political class should look to Germany for two reasons:

First, Germany provides a natural experiment of Keynesian versus Non-Keynesian labor market policy. I would challenge those continuing to push stimulus in the United States as an answer to unemployment (versus raising incentives to take jobs) to explain the halving of Germany’s unemployment rate in such a short time.

Second Germany is a lesson in political courage – to do the right thing regardless of the political consequences. Such courage is sorely lacking on both sides of the aisle in the United States. Few if any American politicians have the courage to risk the demagoguery that would accompany their support for lower welfare or unemployment checks.

For Obama to support such a program would be selling his soul to the devil.

Chosen excerpts by Job Market Monitor

via Why Obama Cannot Match Germany’s Jobs Miracle – Forbes.