Did Hartz IV reform reduce German unemployment? Hardly

Did Harts IV reform make a major contribution to Germany’s falling unemployment rate?

According to a new study by Prof. Andrey Launov and Prof. Klaus Wälde of Johannes Gutenberg University Mainz, the reform’s impact on curbing unemployment in Germany turned out to be surprisingly low.

The study has been published in the journal International Economic Review.

The Hartz IV reform of the German labor market is one of the country’s post-unification’s most controversial. It was widely seen as “the end of the welfare state leading into poverty”.

Over the last few years, Germany has been able to bring unemployment down more successfully and rapidly than virtually all its European and OECD rivals.

Today, German unemployment stands at 5.2%, compared to 7.3% in the USA, 7.6% in the UK, 11.1% in France and 12.2% average among the 17 eurozone countries.

Professors Launov and Wälde set out to determine what role the Hartz reforms and specifically the Hartz IV reform played in this success story.

Hartz IV reform had less impact than Hartz I and III

They found that while the Hartz IV reform’s impact on German employment was negligible, the Hartz I and Hartz III reforms were more effective.

Lawmakers have used unemployment benefits as a tool to regulate performance of the labor market for several decades. More recently, economists have pointed at European unemployment benefits as being too generous and causing rigid and inefficient labor markets.

Economists have argued that high unemployment benefits discourage jobless people from seeking work and contribute to higher and persistent unemployment rates.

Throughout the 1990s and early 2000s several major European economies had unemployment rates persistently above 10%. A number of governments responded with a range of labor market reforms, with a reduction in unemployment benefits at their core.

Germany was among these European nations implementing labor reforms. Between 2003 and 2005 the country implemented the Hartz reforms of the labor market, which included a series of measures.

Hartz IV reform implemented in 2005

In 2005, one of them – the Hartz IV reform – involved a reduction in unemployment assistance benefits for most of the German workforce. It also reduced how long unemployed Germans were entitled to benefits.

While the aim was to reduce unemployment, one of the risks of the Hartz IV reform was the damage that might be inflicted on the most vulnerable in society, including long-term unemployed individuals with the least likelihood of finding work.

It did not take long before the general public perceived the Hartz IV reform as detrimental. People generally felt that it meant the end of the welfare state and a bad legislation for workers.

Hartz IV reform impact on unemployment tiny

Launov and Wälde were surprised to find that the Hartz IV reform’s impact on reducing German unemployment was “exceptionally low”. According to their study “The reform can explain only 0.1 percentage point of the post-Hartz decline of the unemployment rate.”

The researchers wrote that high- and medium-wage workers were much less affected by the prospect of ending up with lower unemployment assistance benefits once their entitlement period had ended. “These workers as a rule find new jobs much faster than they would need to face the benefit cuts arranged under Hartz IV. So for them Hartz IV was virtually inessential.”

For lower-paid and lower-skilled workers, their pre-Hartz IV and post-Hartz IV unemployment benefits were not that different, “..too small to make an impact. Objective difficulties with regard to the employability of such workers make the benefit reform even less useful.” Most long-term unemployed workers are low-paid and low-skilled.

The Hartz IV reform had more of an impact in East than West Germany. Even so, in East Germany the impact was much less than the researchers had expected.

The authors wrote “Nevertheless, unemployment in Germany has sharply fallen after the whole set of Hartz reforms became legally effective.”

The researchers suggest that most of Germany’s low unemployment success comes from the earlier measures of the Hartz III reform, which included restructuring the Federal Employment Agency.

Launov and Wälde say that the following measures implemented under the Hartz III reforms helped reduce unemployment by 1.3 percentage points:

  • The creation of job centers.
  • Making sure each unemployed person had a single contact address for all claims.
  • Reducing the number of unemployed people per case worker.

Reforming the Federal Employment Agency was found to be significantly more effective in reducing joblessness than reducing benefits.

Launov and Wälde concluded that the labor market urgently needed reform, but the most crucial element of Germany’s success was in the particular composition of such reforms.

The authors wrote:

“It has been proven that aspects such as a reduction of unemployment assistance benefits, which is difficult to deal with in terms of distribution policy, have brought us to rather negligible consequences.”

European jobless growth – the European Commission predicted earlier this week that the Eurozone will experience gradual economic growth with persistently high unemployment.