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Getting People Back to Work

by Matt Mitchell on September 26, 2011

in Economic Growth, Unemployment

Germany’s unemployment rate is only 6.2 percent today. This is pretty remarkable given the severity of the recent recession, the slow growth of Germany’s trade partners (including the U.S.) and the unfolding fiscal crisis in the Eurozone.

NPR’s Caitlin Kenney attributes Germany’s relative success to a number of reforms adopted a decade ago. Kenney reports:

To figure out how Germany got where it is today, you need to go back 10 years. In 2002, Germany looked a lot like the United States does now, they had no economic growth and their unemployment rate was 8.7 percent and climbing. The country needed help, so the top man in Germany at the time, Gerhard Schroder, the German chancellor, made in an emergency call to a trusted friend.

The friend was Peter Hartz, a former HR director whom Schroder knew from his VW days. Schroder put Hartz in charge of a commission, the mission of which was to find a way to make Germany’s labor market more flexible. The Hartz commission made it easier to hire someone for a low-paying, temporary job, a so-called “mini job”:

A mini-job isn’t that great of a deal for workers. In these jobs, they can work as many hours as the employer wants them to, but the maximum they can earn is 400 Euros per month. On the plus side, they get to keep it all. They don’t pay any taxes on the money. And they do still get some government assistance.

They also reduced the generosity of unemployment benefits:

Here’s what you get if you’re out of work for more than a year in Germany: 364 euros a month – that’s about $500 – subsidized rent and heat, and a job counselor. Before the Hartz commission, you would get around 50 percent of your last income indefinitely for as long as you were unemployed.

Kenney says that Hartz “wanted to make unemployment uncomfortable so that people would get off of it quickly.”

These changes haven’t made Peter Hartz a popular figure in Germany. His legacy is controversial. He was convicted of paying off union leaders at Volkswagen to go along with his cutbacks.

But no matter how people feel about Hartz, it’s hard to argue with the huge drop in the country’s unemployment rate.

One country’s experience is not dispositive. But a number of carefully designed studies — relying on more sophisticated models and larger data sets — have reached much the same conclusion. Generous unemployment insurance and regulations that add to the cost of employment tend to make for a static, unhealthy labor market. Though designed to make life better for workers, these policies may do them more harm than good.

 

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