In brief

In 2002, the unemployment rate in Germany stood at 13.4 percent, after a period of low growth compared with the rest of Europe. The German chancellor, Gerhard Schröder, asked Volkswagen’s HR director, Peter Hartz, to lead a commission on reform in the labour market – bringing down the unemployment rate was a high priority. The Hartz reforms were enacted between 2003 and 2005 and the unemployment rate was down to 5.5 percent by 2012. And yet the reforms were almost uniformly unpopular.

The challenge

German reunification in 1990 placed intense pressures 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% between 1995 and 2001.” [1]

A major problem was unemployment. “13.4% of the German population (including those in labour schemes) were unemployed in 2002”. [2] Additionally, the German welfare system was seen to be notably over-generous to claimants. This resulted in employers shifting work abroad to find cheaper labour and unemployed persons having no incentive to find work. Ultimately, this led to a reduction in the demand for labour in Germany.”

German reunification was not the only cause of economic stagnation: according to the European Commission, it was responsible for only a third of the differential rate of growth compared to the EU average.

The initiative

In 2002, the German government took action. “Chancellor Schröder convened a Commission under his friend Peter Hartz (the Personnel Director of Volkswagen) ... to reform the labour market, and address the high unemployment rate.” [3]

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 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.” [4]

“These new laws included [5]:

  • The creation of Personal-Service-Agentur [Personal Service Agencies] (PSAs) to act as temp agencies to place unemployed people with employers
  • A grant for entrepreneurs, known as the ‘Ich-AG’ (Me, Inc.), to encourage new businesses.
  • Benefit cuts of up to 30% if a person on unemployment benefits refused to take up a reasonable offer of work.
  • Merging social welfare benefits with long-term unemployment benefits.”

The public impact

In the three years from 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 at the end of 2012.

Taken as a whole, the Hartz Reform package led to a permanent reduction in the German unemployment rate of almost 3 percentage points. “Though the reforms were largely unpopular, they are credited with creating 2.5 million jobs for the German economy and helping the German labour market remain strong through the recession.” [6]

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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

Stakeholder Engagement Fair

The main actor was the Commission itself, which was intended to be representative of German socioeconomic interests. “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.” [7]

The reform process was initiated by the German chancellor and implemented by the German federal government. The other main stakeholders were the German citizens, particularly the unemployed, the group the Hartz Reforms were intended to help,  trade unions and the employers.

The  trade unions were not happy with the reforms and “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.” [8]

Citizens were not engaged with the reforms. “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 came from the National Election in Germany … held on 22 September 2013. There [was] no major party that dares to run on a platform that openly endorses the Hartz reforms.’” [9]

Employers were more favourably disposed and were able to benefit from reforms such as the new types of employment, ‘Minijob’ and ‘Midijob’. “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.” [10]

Political Commitment Strong

Chancellor Gerhard Schröder convened the Hartz Commission and, after its re-election, his Red-Green coalition implemented the reforms recommended by the commission. “The re-election of the Red-Green coalition in September 2002 guaranteed the implementation of the Hartz recommendations, with some minor amendments.” [11]

Despite the unpopularity of these reforms, they were rolled out and as a result the chancellor had to quit as the party leader. “Cuts to social security were controversial not least as Chancellor Schröder had opposed cuts in his 2002 Federal Election campaign. His unpopularity grew and Chancellor Schröder resigned as SPD Party Chairman in February 2004.” [12]

Public Confidence Weak

The lack of public confidence in the Hartz reforms is apparent from their being generally reviled. “Despite being successful, Hartz reforms have remained unpopular in Germany to the extent that the Social Democrats party which implemented the reforms in 2003-05 promised to roll back the reforms if voted to power in 2013 elections ... Due to rising unpopularity, [Chancellor Schröder] had to resign as party chairman in February 2004.”

Policy

Clear Objectives Good

The objectives were clearly stated. They addressed the relevant and pressing issue, i.e., the rising unemployment rate in Germany, which was connected with, although not wholly caused by, the absorption of the East German economy and workforce. The outcome of the reforms were definitely measurable, but the objectives in themselves were not, in that no specific reduction in the unemployment rate was targeted.

Evidence Good

There was no information on any existing similar reforms implemented around the world. The reforms did not draw their model from any other source. However, “the process started with two competing pilot studies developing a conceptual framework for the evaluation.” [13]

Feasibility Good

The reforms were proposed, driven and recommendations fully endorsed by the German Chancellor, giving them political leverage. Once elected the Chancellor obtained an electoral mandate for the reforms suggesting implementation was legally feasible.

The reforms were also in line with a long term EU objectives to fulfil employment guidelines, as outlined in the EU Lisbon Strategy in 2000. This would suggest that the reforms would not be opposed by EU courts. However, European courts did require some amendments to the reforms, specifically regarding protecting the rights of older workers. [14]

Action

Management Good

The Commission was instigated by the Chancellor and  led by Peter Hartz, the Personnel Director of Volkswagen, who has extensive management experience.

Following the Hartz Commission, four recommendations were implemented between 2003 and 2005, managed by Government agencies. The management of the implementation of the reforms did receive some criticism, with claims 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” resulting in confusion and misconceptions. However, the reforms were managed successfully on the whole. A week before the Hartz IV reform was due to be introduced, 94% of eligibility questionnaires had been returned and 2.2 million out of 3.8 million had received their benefit statements.

Measurement Strong

The outcome of the Hartz reforms was measured in an extremely thorough and rigorous way. “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. The process started with two competing pilot studies developing a conceptual framework for the evaluation (Fertig et al. 2004, Hagen and Spermann 2004) and subsequently was put out to tender. Currently more than 20 economic and sociological research institutes with about 100 researchers [have been] involved in the evaluation.” [15]

Alignment Weak

The German government was the major actor in the Hartz reforms, first by setting up the Commission and then by implementing the proposed reforms.

There was no real alignment with either the public (see Public confidence above) or the trade unions (see Stakeholder engagement above). The unions had factional disputes with the government and organised demonstrations against the reforms.

There was some alignment with employers, who benefited more from the reforms, and with the unemployed, many of whom were able to find work as a result.

Bibliography

The Hartz Reforms…and their lessons for the UK, GLYN GASKARTH, 2014, Centre for Policy Studies

German labour reforms: Unpopular success, Tom Krebs, Martin Scheffel, 20 September 2013, VOX

Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany, Lena Jacobi, Jochen Kluve, April 2006, DISCUSSION PAPER SERIES, Forschungsinstitut zur Zukunft der Arbeit [Institute for the Study of Labour]

European crisis: Germany and the role of the trade unions, Sibylle Kaczorek, 11 November 2012, green left weekly

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