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Labor Market Reform

The Hartz Experience

Dr. Michael Jung, Brussels, June 15, 2013

CURRENTLY, IN EUROPE...

• Post-crisis depression, huge unemployment

• Debt consolidation vs. growth needs

• Declining returns of monetary easing

• Obvious limits of fiscal stimulus

• Emerging consensus: structural levers for growth!

3

EUROPEAN LABOR MARKETS – HUGE DISPARITIES

SOURCE: Eurostat

1 Relative position of most countries from 2008 - 2012 stable

2 Vacancy rate = Number of job vacancies divided by total number of jobs

4

SOURCE: ESPON

EUROPEAN LABOR MARKETS – HUGE DISPARITIES

5

0.00

20.00

40.00

60.00

0.00

20.00

40.00

60.00

0.00

20.00

40.00

60.00

0.00

20.00

40.00

60.00

0.00

20.00

40.00

60.00

2000 2005 2010 2015 2000 2005 2010 2015

2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015

Belgium Bulgaria Czech Denmark Germany

Estonia Ireland Greece Spain France

Italy Latvia Lithuania Hungary Netherlands

Austria Poland Portugal Slovenia Slovakia

Finland Sweden UK

SOURCE: Eurostat Labour Force Survey

YOUTH UNEMPLOYMENT IN EUROPE 2000 – 2012Share of Jobseekers

6

0.00

5.00

10.00

15.00

20.00

0.00

5.00

10.00

15.00

20.00

0.00

5.00

10.00

15.00

20.00

0.00

5.00

10.00

15.00

20.00

0.00

5.00

10.00

15.00

20.00

2000 2005 2010 2015 2000 2005 2010 2015

2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015

Belgium Bulgaria Czech Denmark Germany

Estonia Ireland Greece Spain France

Italy Latvia Lithuania Hungary Netherlands

Austria Poland Portugal Slovenia Slovakia

Finland Sweden UK

yearSOURCE: Eurostat Labour Force Survey

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YOUTH UNEMPLOYMENT IN EUROPE 2000 – 2012Share of Age Cohort

HARTZ REFORMS – THE PREVAILING VIEW

Germany 2002: Amidst high and rising unemployment – „a national

crisis“ – the Schröder Government defines an ambitious reform

(Agenda 2010) for labor market policy

Germany 2005: Reform programs are implemented in 2003-2006.

Their impact is huge. Unemployment – after a 5 million peak in 2005 –

falls drastically.

Germany 2009: Despite a severe crisis-driven downturn, employment

proves resilient. And it continues its build-up, in stark contrast to

soaring unemployment across Europe.

Europe 2011: German Labor Market Reform is seen as a model for

strategies elsewhere – a supply side catalyst of growth in a context of

fiscal/financial consolidation

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... OR, IN MORE ARTICULATE WORDS, THE LRB OF JUNE 6:

„... the gigantic, unforeseen costs of unification brought Germany to a halt in the 1990s.

What followed changed the country and put down a marker for the rest of Europe. It was ... Gerhard Schröder, who as chancellor forced through a battery of brutally deregulatingreforms which downsized welfare payments and, above all, ‘liberalised the labour market’ – curtailing unemployment benefit, abolishing protection for the low-paid andencouraging employers to offer short-term jobs. Unemployment at first soared, thenbegan to fall steadily. Export industry recovered. Growth accelerated again.

The rich grew richer, while the lower working class – women especially – began toencounter a degree of poverty and job insecurity they had never known. The ‘partnership’ consensus which had marked the West German social model before 1989 had beenviolated, perhaps beyond repair.

...Agenda 2010 – the radical remodelling of postwar welfare states on neoliberal lines –should be copied all over Europe. Ronald Reagan did it, Thatcher and Tony Blair did it, Germany did it – so why can’t François Hollande do it?“

(NEIL ASCHERSON)

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SOURCE: Eurostat

5,000

4,000

3,000

2,000

Unemployment in Germany

(Thousands, Average/Year)

TURNAROUND GERMAN LABOR MARKET: EMPIRICAL EVIDENCE

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EUROPEAN LABOUR MARKET PERFORMANCE: COMPARISON

SOURCE: Eurostat

UK8.0

9.0

10.0

11.0Italy

Germany

France

5.0

6.0

7.0

Unemployment rate

%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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HARTZ PROGRAM PROFILE – „FORCE AND FACILITATE “

Hartz I: Job Creation (2003) Liberalizing temporary employment

Upgrading training programs

Hartz II: Job Flexibility (2003) Mini & Midi Jobs

Supporting self-employment

Hartz III: Service Quality (2004) Organization of public services &

processes

Service performance metrics &

monitoring

Hartz IV: Benefits Redesign (2005) Shorter insurance coverage (limit 12

months)

Thereafter: integration of

insurance & welfare

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REFORM IMPACT: SERIOUS PROGRESS...

Flexibility

- strong increase of temporary and part-time jobs- significant growth in participation rate

Budget transparency and efficiency

- micro-profiling of unemployment patterns (individual, context)- “productivity” of public intervention (e.g. training) – massive savings- service performance management

Mindsets

- positive influence: mobilization, less slack in frictional unemployment- critical/risky: public perception of „victim“ groups&milieus (“ghettos“)

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REFORM IMPACT: ... YET PROBABLY NOT KEY FACTOR IN

LABOUR MARKET TURNAROUND...

Critical trends vs. reform implementation

- exports

- labor cost

- German „country business model“

- favourable macro context

German business culture: continuity and change

Labor market parameters: proportions & statistics

14

SOURCE: IHS Global Insight

400

600

800

900

1,000

1,100

1,200

1997 2005

0

500

700

2012

German Exports

EUR bn

Germany

France

2005

UK

25

20

30

1997

0

35

40

45

Italy

2012

European Exports – Share of GDP

%

GERMAN EXPORTS: STRONG MOMENTUM SINCE LATE 90‘S

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LABOR COSTS – GERMANY, EUROPE

SOURCE: Federal Statistical Office Germany; Eurostat; European Commission; Hans-Böckler-Stiftung

130

0

1997 20122005

110

100

120

Unit Labor Costs – Manufacturing, Germany

Nominal, 1991 = 100

140

150

160

170

Germany

2005

130

120

2012

France

UK

Italy

0

1997

110

Unit labor Costs – Overall

Nominal, 1990 = 100

20051997 2012

Wage Increases – Metal Workers, Germany

Nominal, %

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EMPLOYMENT PATTERNS: STRUCTURAL CHANGE

SOURCE: Eurostat; Federal Statistical Office Germany

22

4

5

23

0

3

2

1

25

24

20111997 2005

Germany: traditional vs.

“flexible” employment

Million

15

20

25

30

35

40

1997 20122005

0

10

Part-time vs. full-time

employment

Part-time in % of full-time

2012

68

1997 2005

64

72

76

60

0

Participation rates

%

Long-term employment

contracts

Part-time

Self-employed

TemporaryMarginal

employment

Germany

UK

France

Italy

UK

Germany

France

Italy

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“COUNTRY BUSINESS MODELS”

SOURCE: IHS Global Insight

22

24

14

Italy

0

1997

21

France

Germany

19

17

16

18

20

2005 2012

12

10

UK

11

13

15

23

Share Manufacturing Sector

% of GDP

0

10

11

UK

Germany

Italy

France

14

1997 2005 2012

9

12

8

13

15

Financial & Building Sectors

% of GDP

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Structural unemployment – prospects for

long-term jobless, and problem clusters

Training quality and impact –

elusive „effective intervention“

Polarizing labor market dynamics –

marginal jobs, eroding middle ground

Declining share of „break-even work lifes“ –

life income covering total cost of life

...STUBBORN PERSISTENCE OF „ETERNAL ISSUES“

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Crisis interventions aimed at key

macroeconomic outcomes:

debt, growth, employment.

Policy levers influence market

conduct (fiscal and monetary) and

structure (rules and governance)

A. Economic repair:

Implementing the right “technology”:

monetary, fiscal, structural

B. Societal choice:

Redesign and adaptation of

political, cultural, economic profiles

Economic performance is rooted in

complex background system:

“deep structures in context“

Targeted technical intervention is

successful when addressing pivotal

bottlenecks – only then.

POLITICAL ECONOMY: INTERVENTION PARADIGM?

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Politics &

Culture

Resources &

Assets

Economic

Profile

Context: Global &

Technology Dynamics

• Natural

• Human

• Financial&Material

• ‘Business Model‘ – Products, Markets

• Networks/Connectivity – Material/external

• Governance/Institutions/Values

• Mindset/Leadership/Ideas

• Trust & Values

• Institutional Capacity

• Convergence &

Leadership

• Expansive/contractive

• Stable/volatile�Stability

�Flexibility

�Energy

����Growth

„DEEP STRUCTURES IN CONTEXT“

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FUNDAMENTAL CHOICES, CHANGING ENVIRONMENT

1. Strategic paradigm?

− economic repair: testing the limits of

the social contract

− societal change: strategic

transformation of national profiles

2. Catalytic set-up?

− national, international, supranational

− contracts vs. contexts

3. Legitimacy and leadership?

− lacking narrative

− leadership topology

1. Resilience: cultures, institutions, habits

− capacity for change

− time horizons

2. Growth concerns

− future trendlines

− oxymoron growth-consolidation

3. Future labor markets:

− size and shape

− digital substitution (services)

− asymmetric plasticity

supply/demand

4. Demographic disequilibrium

Fundamental Policy Choices Change: Known Unknowns

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SOURCE: ESPON

EUROPEAN LABOR MARKETS – HUGE DISPARITIES

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OECDMAKING THE BELGIUM LABOUR

MARKET MORE INCLUSIVE

Brussels, 15 June 2013

By Jens Høj, OECD Economics Department

Based on the OECD Economic Surveys of Belgium 2011 and 2013.

A more inclusive labour market is a key to boost employment rates

2

0

10

20

30

40

50

6070

80

90

0

10

20

30

40

50

6070

80

90A. Total

TUR

HU

N

ITA

SVK

POL

CH

L

ESP

GR

C

ISR

MEX IR

L

EST

BEL

KOR

FRA

OEC

D

CZE LU

X

PRT

EU15

SVN

USA FI

N

JPN

GBR

DEU

CAN AU

T

NZL

AUS

SWE

DN

K

NLD

NO

R

CH

E

ISL

0

1020

30

40

50

60

70

8090

0

1020

30

40

50

60

70

8090

B. Men

HU

N

EST

ISR

IRL

SVK

POL

ESP

TUR

BEL IT

A

FRA

SVN

FIN

PRT

GR

C

USA

EU15

CH

L

OEC

D

LUX

CZE

KOR

CAN

SWE

GBR

DN

K

DEU AU

T

NO

R

NZL

MEX

AUS

JPN

NLD IS

L

CH

E

0

10

20

30

4050

60

70

80

90

0

10

20

30

4050

60

70

80

90C. Women

TUR

MEX IT

A

CH

L

GR

C

HU

N

SVK

KOR

ESP

POL

CZE IR

L

BEL

OEC

D

ISR

LUX

EU15

FRA

JPN

EST

PRT

USA

SVN

GBR

DEU AU

S

AUT

NZL FIN

CAN NLD

SWE

DN

K

CH

E

NO

R

ISL

The low employment rates are concentrated

among younger and older workers

Employment rate per age group

3

Youth have poor employment prospects after

leaving school

4

0

1

2

3

4

5

0

1

2

3

4

5Total Low-skilled²

TU

R

HU

N

GR

C

CZ

E

ITA

SV

K

PR

T

ME

X

BE

L

ES

P

OE

CD

US

A

LU

X

PO

L

NZ

L

SW

E

FIN

GB

R

FR

A

CA

N

DE

U

AU

T

CH

E

DN

K

ISL

AU

S

NLD

Expected number of years spent in employment during the five years after leaving school

Workers with immigrant background have low

employment rates, irrespective of education

5

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

Low skilled Medium skilled Highly skilled

National citizens

Other EU citizens

Non EU citizens

Open unemployment rates are not

particular high, but …..

6

0

10

20

30

40

50

0

10

20

30

40

50NL

D

CHE

JPN

AUT

DEU

NOR

KOR

MEX AU

S

ISR

CAN

DNK

ISL

SVN OE

…

LUX

NZL

USA

CHL

CZE

TUR

BEL

FIN

GBR

EU15

EST

FRA

SWE

POL

HUN

ITA

PRT

IRL

SVK

GRC

ESP

%%

A. Youth unemployment: age 15-24, 2011

0

5

10

15

20

25

0

5

10

15

20

25

NOR

KOR

CHE

AUT

NLD

JPN

LUX

AUS

MEX IS

R

DEU

NZL

CZE

ISL

CHL

BEL

CAN

SWE

DNK

FIN

GBR OE

…

SVN

ITA

USA

FRA

EU15

POL

TUR

HUN

EST

PRT

SVK

IRL

GRC

ESP

%%

B. Total unemployment, 2011

0

1

2

3

4

5

6

0

1

2

3

4

5

6

POL

PRT

NZL

USA

CAN

DNK

KOR

NOR

AUT

NLD

FRA

SVK

HUN

ESP

IRL

CHE

CZE

FIN

JPN

LUX

DEU

ITA

BEL

C. Share of employees on reduced working time schemes

2009 2007

Long-term unemployment is prevalent

7

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

2007Q32010Q4

A. Six months and over

ISL

NO

R

SW

E

DN

K

TUR

FIN

AU

T

SV

N

NLD

GB

R

PO

L

FRA

CH

E

EU

15

ES

P

ITA

DE

U

GR

C

BE

L

ES

T

CZE

PR

T

IRL

HU

N

SV

K

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

2007Q32010Q4

B. One year and over

NO

R

ISL

SW

E

DN

K

TUR

AU

T

SV

N

FIN

NLD

CH

E

GB

R

PO

L

FRA

ES

P

EU

15

CZE

GR

C

ITA

DE

U

ES

T

BE

L

HU

N

PR

T

IRL

SV

K

Is the labour market ready for the population ageing?

8The share of +65 over working age population

The low effective retirement age is part of the problem

Retirement ages

9

The early retirement reform improves

working incentives, but more must be done

• The 2012 reform raises the admission age and career requirements to enter early retirement or pre-pension schemes.

– This will increase the average retirement age.

– But older unemployed still have insufficient incentives to look for a job

• Tenure wage element push up reservation wages

10

Additional measures to increase

the effective retirement age

• Standard search obligations for older unemployed

• Introduce individual assessments of work capacity.

• Consider raising the legal retirement age to reflect past gains in life expectancy and then linking it to further longevity gains.

• Introduce a (larger) differential in the accumulation of pension entitlements between unemployed and employed.

11

The reform of unemployment benefits

strengthens job search incentives as:

• The unemployment benefits decline gradually over time

• The duration of the ”waiting allowance” is capped

• Job search monitoring is strengthened

12

However, labour demand is hampered by high tax wedges

13

And high statutory minimum wages

14

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

ME

X

JP

N

ES

P

CZ

E

TU

R

US

A

KO

R

LU

X

CA

N

NLD

OE

CD

PO

L

HU

N

PR

T

SV

K

GR

C

GB

R

IRL

AU

S

BE

L

NZ

L

FR

A

(as a percentage of the median wage)

And a wage formation process that has not prevented export market losses

Export market shares

15

Main recommendations for further labour market reforms

• Boost labour demand:

– reduce sectoral minimum wages to the legal level

– concentrate social security contributions cuts on low-wage workers

• The government and social partners should consider a new wage formation process to link wage developments more closely to domestic productivity developments

– As part of this reform, social partners should be encouraged to phase out the automatic wage indexation mechanism

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• Abolish hourly restrictions on jobs.

• Phase-out youth minimum wages more gradually (or, introduce entry wages).

• Enhance language teaching to immigrants of all age groups.

• Postpone streaming in education and focus available educational resources

Measures to improve labour market access for youth and immigrants

17

• Thank you!• Dank u wel!• Merci!• Danke!• Mange tak!

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