The Hartz employment reforms in Germany

Great Policy Successes This case study corresponds to a chapter by Florian Spohr, entitled "Germany’s Labour Market Polices: How the Sick Man of Europe Performed a Second Economic Miracle", in the book Great Policy Successes, co-edited by Mallory Compton and Paul 't Hart. The book brings together fifteen cases of highly successful governance from around the world. For further information on this line of research, see: https://successfulpublicgovernance.com.

After a period of low economic growth and facing a high unemployment rate (13.4% in 2002), in 2003, German chancellor, Gerhard Schröder announced Agenda 2010 – a comprehensive set of policies for reforming Germany’s labour market and social welfare system.[1] At the core of these policies were the Hartz reforms, named after Volkswagen’s HR director Peter Hartz, who led a commission on reforming the labour market, with the main aim of bringing down the unemployment rate. The Hartz reforms, which included restructuring the Federal Employment Agency, implementing stricter sanctions and introducing a low-wage sector, were enacted in four stages (Hartz I-IV) between 2003 and 2005. Though the reforms remain unpopular with large parts of the German population, by 2012, Germany’s unemployment rate had fallen to 5.5 percent. 

The challenge

German reunification in 1990 placed intense pressure on the German economy. “Only a few years after German reunification, the German economy began to stagnate. Between 1994 and 2002, it grew by less than the EU average. The GDP growth rate was only 1.6 percent between 1995 and 2001.”[3

A major problem was unemployment: “13.4 percent of the German population (including those in labour schemes) were unemployed in 2002”.[4] A particular challenge was long-term unemployment, as well as the lack of job opportunities for young people. Additionally, the German welfare system was seen as overgenerous to claimants. This meant employers shifted work abroad to find cheaper labour, and reduced the incentives for unemployed people to find work. Ultimately, this led to a reduction in the demand for labour in Germany. The challenge for the German government was to increase employment by reforming the German labour market and the country’s welfare system.

The initiative

In 2002, the newly-elected Red-Green coalition government under Chancellor Schröder took action to tackle economic stagnation and rising unemployment rates in Germany. Schröder, the political head of the reform, commissioned Peter Hartz, Volkswagen’s HR director, to design a set of policies that would, in the first instance, reform the German Federal Employment Agency, but would eventually result in the most comprehensive reform of the German labour market to date.[5

Hartz took on the role of head of the commission for modern services in the labour market, and soon became the strategic leader of the reforms, which led to the unofficial but widely used term, “Hartz reforms”. During summer 2002, the Hartz Commission drafted a report which was intended to propose a reorganisation of Germany’s employment services. After several amendments and its incorporation into Chancellor Schröder’s Agenda 2010, it resulted in one of the most extensive social policy reforms in Germany since the Second World War.[6

Following the Hartz Commission’s recommendations, four Laws for Reform of the Job Market (or Hartz reforms) were enacted in stages between January 2003 (Hartz I) and January 2005 (Hartz IV). The new set of laws involved: 

  • The creation of Personal-Service-Agentur [Personal Service Agencies] (PSAs) to act as agencies to place unemployed people with employers (Hartz I);
  • A grant for entrepreneurs, known as the “Ich-AG” (Me, Inc.), to encourage new businesses (Hartz II);
  • The creation of part-time job opportunities with a low threshold and minimum salary, “Mini-jobs” and “Midi-jobs” (Hartz II);
  • Restructuring the Federal Employment Agency and creation of job centres for more effectively assisting the jobless with their job searches (Hartz III);
  • Benefit cuts of up to 30 percent if a person on unemployment benefits refused to take up a reasonable offer of work (Hartz IV); and
  • The merger of social welfare benefits with long-term unemployment benefits (Hartz IV).[3][6

Over a period of three years, the reforms aimed to integrate 2 million unemployed into the labour market, and were intended to trigger an economic upturn.[7

The public impact

In the three years after 2005, the German unemployment rate fell from 11 percent to 7.5 percent. It rose slightly during the financial crisis of 2007-08 and then continued its downward trend, reaching 5.5 percent by the end of 2012.[3

The reforms are often credited with having created 2.5 million jobs for the German economy and having helped the German labour market remain strong throughout the recession.[3] However, they have always been controversial. By December 2010, the result of the Hartz reforms was 7.4 million people working in jobs limited to EUR400 a month and the doubling to 780,000 of the number of workers on temporary contracts.[1] 

On the one hand, many employers were able to benefit from elements of the Hartz reform package, such as the new types of employment known as “Mini-jobs” and “Midi-jobs”. “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.”[2] On the other hand, as the German cooperative newspaper “taz” pointed out in its critical articles on Hartz reforms, these new types of employment increased the number of people working in precarious conditions and without legal claims to social insurance or worker protection. It argued that the quantitative success of a lower unemployment rate needed to be seen in the light of these low-quality employment conditions.[8] 

Furthermore, Gustav Horn, academic director of the Institut für Makroökonomie und Konjunkturforschung (Macroeconomic Policy Institute), argued that the number of long-term unemployed did not noticeably decrease as a result of the reforms. Instead, the reforms helped those unemployed people who already had relatively good chances of finding another job.[9

Overall, the number of unemployed did decrease following the implementation of the reforms over the course of Agenda 2010. Nevertheless, two points remain disputed: firstly, how far those improvements could be explained by the Hartz reforms; and secondly, whether the reforms adversely affected social equality and social welfare in Germany. Agenda 2010, including the Hartz reforms, which has been opposed by different political and civic actors since its implementation, has recently returned to the forefront of the Social Democrats’ political agenda, putting at risk one of Germany’s most extensive social reform policies.[10]   

Written by Johanna Hopp

What did and didn't work

All cases in our Public Impact Observatory have been evaluated for performance against the elements of our Public Impact Fundamentals.

Legitimacy

Public Confidence Weak

The lack of public confidence in the Hartz reforms and Agenda 2010 was one of the major issues that continues to undermine the policy's overall success. Despite their role in reducing unemployment, the Hartz reforms have remained controversial in Germany to the extent that the SPD, which implemented the reforms in 2003-05, promised to roll back the reforms if voted into power in the 2013 elections. 

In 2004, Forsa, one of the main German pollsters, conducted a survey of the public’s opinion about the Hartz reforms. According to this survey, 46 percent considered the reforms to be “essentially right” and 42 percent “essentially wrong”. In the former East Germany, the reforms were rejected by 52 percent, whereas in the former West only 40 percent rejected the reforms.[14] These numbers display a real lack of public consensus surrounding the adoption of  the reforms.  

The trade unions also played an important role in making clear the lack of public confidence in the Hartz reforms. They organised “Monday demonstrations” to protest against the reforms of both the labour market and the social security system.[6]

Stakeholder Engagement Fair

The Hartz Commission was the main body engaged in designing the set of labour market reforms. Despite the commission’s efforts to reach out to various experts and interest groups during the process of drafting the reforms, many relevant actors – such as trade unions and employers’ associations – were insufficiently involved in the policy design. This lack of engagement of key stakeholders influenced the sceptical public response to the Hartz reforms, and these doubts have lasted to the present day.

The Hartz reform was initiated, designed and steered by the Hartz Commission. It consisted of representatives from diverse backgrounds and was intended to be representative of all German socioeconomic interests.[1] “The Hartz Commission was composed of 15 experts: two academics (a law professor and a political scientist), two trade unionists, one representative of an employers’ organisation, representatives from management consultancies, company boards and the government.”[3]

In the first half of 2002, the Hartz commission developed the Hartz report, which was published in the summer of 2002. It served as the baseline for the reforms and contained concrete proposals on how to reduce unemployment and restructure the Federal Employment Agency. While drafting the report, the commission reached out to several experts, political and private interest groups, and associations for stakeholder dialogues and benchmarking processes, aiming to increase the representativeness of the commission.[11]

In spite of these efforts, the commission itself remained unusually exclusive – two of the most important actors for employers, the Federation of German Industry and the German Confederation of Employers’ Association, were not represented, nor were representatives of opposition parties or the Labour ministry.[3] 

Other important stakeholders, such as trade unions, were further marginalised during the process of policy design. This resulted in persistent public doubts and discontent about the Hartz reforms, and the trade unions – in particular – objected to them strongly. “The trade unions viewed the creation of PSAs and the expansion of temporary work as a threat to their membership. Few temporary workers were members of trade unions. They represented a reserve labour force that the unions feared could be utilised to undercut unionised workers.”[3] 

Political Commitment Strong

The execution of the Hartz reforms was mainly shaped by the strong political commitment of Chancellor Schröder’s governing coalition. Schröder convened the Hartz Commission and, after its re-election, his Red-Green coalition enacted the recommended reforms. “The re-election of the Red-Green coalition in September 2002 guaranteed the implementation of the Hartz recommendations, with some minor amendments.”[2]

Despite their unpopularity, these reforms were rolled out. Chancellor Schröder’s unpopularity grew with their implementation – even more so as he reinforced the Hartz IV laws in 2004, which involved cuts to social security schemes. “Cuts to social security were controversial not least as Chancellor Schröder had opposed cuts in his 2002 Federal Election campaign.”[3] 

As a consequence of his poor public perception, Chancellor Schröder had to resign as party chairman of the Sozialdemokratische Partei Deutschlands [German Social Democrat Party] (SPD) in February 2004. The reforms, including Hartz IV and the cutbacks to social security, were carried through nonetheless, showing the government’s determination and political commitment to the reforms.[3] This happened against the will of various members of parliament and of members of opposing parties and trade unions, who objected to the reforms and sought to hinder their implementation. 

Even members of Schröder’s own party, the SPD, opposed the reforms. Several members initiated an intra-party petition against Chancellor Schröder, his policy reforms of Agenda 2010, and the Hartz reforms included in it. Other party members, such as Andrea Nahles, openly voted against the new set of laws.[6]  In 2019, the Hartz laws are still in effect, but still controversial with various parties in the German parliament. In particular, the Social Democrats recently put the Hartz reforms back at the top of their political agenda, with Nahles insisting that “we will leave Hartz IV behind us".[12]

In fact, the commitment to effecting these labour market policies in spite of strong political headwinds was remarkable when compared to other political reforms in Germany. “Only a few labour market policies have been as comprehensively designed and quickly realised as the laws for modern services in the labour market.”[13] This was due in particular to the political commitment of Chancellor Schröder and the Red-Green coalition in government during the implementation phase.

Policy

Clear Objectives Strong

The main objective of the Hartz reforms was clearly stated at the outset – to tackle the rising unemployment rate. 

The reforms sought to reduce unemployment by: 

  • Restructuring the Federal Employment Agency;
  • Increasing job creation by promoting part-time employment (Mini-jobs and Midi-Jobs) and self-employment (Ich-AG);
  • Improving the placement of the jobless by creating job centres throughout the country; and
  • Promoting employment opportunities, especially for young people and the elderly.

In 2002, the German Federal Ministry of Labour and Social Affairs estimated that in the three years following the reforms’ implementation, 2 million unemployed people would be in a job.[7]

Evidence Strong

Before implementing the Hartz reforms, the government sought to gather evidence about the feasibility of the policy package. This involved commissioning two competing pilot studies (Fertig et al [2004] and Hagen and Spermann [2004]), with the aim of developing a conceptual framework for the evaluation of the draft policy.[5]

Furthermore, benchmarking processes were initiated in March 2002 to examine and assess experts’ and stakeholders’ experience of labour market reforms in other European countries, particularly those in the UK, Denmark, and the Netherlands.[11] 

Feasibility Good

The reforms were fully endorsed by the German chancellor, giving them political leverage. They were aligned with a long-term EU objective of fulfilling the employment guidelines outlined in the EU Lisbon Strategy of 2000. The European Commission and European Courts requested alterations to certain specific mechanisms aiming to encourage employment for workers aged over 52. These alterations were then adopted by the Hartz Commission.[3]

The commission developed several strategies for financing the Hartz reforms – for instance, the Capital For Work programme – which were accepted by the Ministry of Labour and Social Affairs. According to the Capital For Work model, SMEs received a financial package in the form of loans if their business were to hire a previously jobless person after the termination of his or her trial period. “SMEs and freelancers receive discounted loans of up to EUR100,000, provided that they hire unemployed people.”[15]  A loan of EUR764 million, provided in 2002 by the federally owned bank, Kreditanstalt für Wiederaufbau (KfW)  (previous case study: KfW development bank) supported these reforms.[15]

However, the very short timeframe for implementing such a complex set of laws risked the feasibility of the reform. Only a few months elapsed between releasing a first draft of the legislation and the concrete proposal, and amendments to the Hartz IV law were made as late as September 2004, even though the reform was to take legal effect on 1 January 2005. This led to a heavy workload for several stakeholders, such as administrative staff at the Federal Employment Agency in Berlin and in local job centres across Germany (see Management below).[16] 

Action

Management Fair

Following the conclusions of the Hartz Commission, the laws Hartz I-IV were implemented between 2003 and 2005. This process was managed by the Ministry of Labour and Social Affairs in collaboration with the municipalities and new bodies such as the PSAs and job centres. The PSAs were set up by the state, “but could be spun out to become private entities undertaking contract work for the state”.[3] However, the introduction of the PSAs was considered unsuccessful due to a lack of publicity and the inflated targets set by the Hartz Report, which could not be achieved by the PSAs themselves.[3] 

William Tompson, senior economist at the OECD, further claimed that “little was done to explain the controversial Hartz IV reform either to the public at large or to those who would be directly affected by it”.[3] The 2004 Forsa study (see Public Confidence above) suggested that 75 percent of the German population still felt inadequately informed by the government about the reforms.[14]

Furthermore, the short timeframe from the release of the final set of laws until their actual execution – in the case of Hartz IV, for example – created a managerial challenge which was poorly handled. Unemployment benefits under Hartz IV were means-tested, meaning that a comprehensive set of data had to be evaluated for each potential beneficiary. Initially, the IT system which was developed to handle the database kept crashing, and the workload of staff in both the local job centres and the Federal Employment Agency in Berlin rose exponentially, so that these institutions’ opening hours were extended to 10pm and there were additional shifts at weekends. As The Economist stated in 2004, “thousands of staff are working extra shifts to prepare the launch on January 1st of Hartz IV”.[16]

Despite these challenges, the government stated that “the whole operation has gone surprisingly smoothly”, and within a week of the deadline, 2.2 million benefit statements had been issued, based on the questionnaires which had been sent out to potential beneficiaries.[16] This allowed for the majority of claimants to receive their Hartz IV payments from 2005 onwards. 

Measurement Strong

Overall, the outcome of the Hartz reforms was measured in a thorough and rigorous way. Several measures were implemented which helped the government keep track of progress and, if necessary, adjust the relevant instruments. “The need for rigorous scientific evaluation of programme effectiveness, in order to be able to continuously optimise existing programmes on the basis of conclusive empirical evidence, was recognised by policymakers, and a corresponding evaluation mandate was implemented with the Hartz reforms. Hence, the Hartz reforms constitute the first major reform in the history of the German welfare state that is accompanied by a comprehensive scientific evaluation on behalf of the government.”[5] 

The process started with two competing pilot studies (see Evidence above), which developed a conceptual framework for the evaluation, involving “more than 20 economic and sociological research institutes with about 100 researchers”.[5] Metrics were tracked over time, and the instruments were continually readjusted in response to the changing labour market. However, hardly any of the instruments implemented as part of Hartz I and II are still in effect.[5] 

One of those evaluations, which was run by the Social Science and Research Centre, investigated the effectiveness and success of the introduction of the PSAs. In 2006, the report, The Marriage of Flexibility and Security: Lessons from the Hartz Reforms in Germany, recommended the abolition of the PSAs due to their low success rates of job placement and the significant sums invested in them by the government. The government did not follow these recommendations, but from 2006 onwards the regional labour agencies were no longer obliged to provide a PSA.[3] 

Opinions differ about the robustness of the microeconomic evaluation methods and overall indicators, especially concerning the argument that the Hartz reforms led to an actual reduction in the unemployment rate.[16]

Alignment Fair

When the Hartz reform concept was officially launched in August 2002, the federal cabinet approved the propositions. Following this approval, the German parliament decided on the implementation of Hartz I and Hartz II in 2002. 

However, Hartz III and Hartz IV caused greater controversy among the relevant stakeholders. In particular, trade unions were critical of the reforms, and members of the Red-Green coalition also voiced criticisms. In response, Chancellor Schröder convened a meeting with representatives of trade unions and employers in March 2003, which resulted in several amendments to the proposed Hartz laws. 

This comprehensive and reworked set of reforms was launched in March 2003 as Agenda 2010, and was able to eventually align the different interests.[18] Klaus Barthel, a Social Democrat who had formerly opposed the reforms, stated that “these are crucial changes”,[19], and were an important stage in aligning a majority of the coalition members to vote for the Hartz reforms. 

Nevertheless, the poll reflected the controversial nature of the reforms, even within the Red-Green coalition. This is best reflected in the number of MPs from the governing parties who voted against Hartz IV. In 2002, the coalition failed to secure a majority for its own reforms: twelve MPs – six from the SPD and six Greens – voted against Hartz IV, thus making the government dependent on the conservative-liberal opposition.[20]

Eventually, 304 MPs voted for Hartz III and the restructuring of the Federal Employment Agency, while only 294 voted against. Similarly, 306 MPs voted for Hartz IV and 291 voted against. Thus, the controversial legislation, which entailed the consolidation of unemployment benefits and social benefits under the umbrella of “activating measures”, was passed into law.[21