Employment Dynamics in Germany: Lessons to be Learned from the Hartz reforms Günther Schmid Keynote to the conference “Employment: Challenge for Sustainable Economic Development in the MENA Region” Organized by GTZ Sector Network Istanbul, 6 th to 8 th November 2007

2 The basic elements of employment dynamics The wealth of nations is always “regulated by two different circumstances; first, by the skill, dexterity, and judgement with which its labour is generally applied; and second, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed” (Adam Smith, The Wealth of Nations, 1776/1937, vol. 1, p. VII) Germany successful in quantity but not in quality

3 Stylised facts of German employment dynamics: I  Economic growth 2.9% (2006) and first half 2007  Government deficit melting down to zero  Employment intensive growth > 1 million  Unemployment down by > 1 million  Employment rates of ‘old’ workers up by 15 percentage points since 2000  Self-employment up to 10.4% However, all that glitters is not gold

4 Stylised facts of German employment dynamics: II  Low productivity dynamics (1.6% D; 2.4% USA)  Increase of precarious non-standard employment  High unemployment rates of low-skilled people  High regional disparities in unemployment and employment dynamics  Low employment rates of low-skilled people  Women still disadvantaged in terms of wages and good jobs What are the factors that ensure sustainable employment?

5 An Analytical Framework of Employment Dynamics External & Internal Shocks International Relations and Endogenous Changes Interaction of Agents guided by Institutions Labour Market and Employment Policy ► Demography ► Migration ► Work Preferences Supply Shocks ► Education & Skills ► Social Security ► Employment Protection Supply Employability ► Globalisation ► New Technologies ► Consumer Preferences Demand Shocks ► Technology & Capital ► Effective Demand ► Employment Regulation Demand Productivity Inactive Population Active Labour Force Goods & Services Investment Employment Wages Work

6 Determinants of positive employment dynamics Successful strategies depend on the proper interaction of institutions that influence employability on the labour supply side and productivity on the labour demand side. Employability depends obviously on education & skills, but less obviously and much contested also on social security and employment protection. Productivity depends obviously on technology & capital, but less obviously and much contested on effective demand and employment regulation.

7 Flexicurity Proposition Neither the regulation nor the deregulation theory provide and adequate analytical framework. It is flexicurity systems based on complementary institutions that enhance both flexibility and security in employment relationships.

8 What explains Germany’s success and failure? Institutional conditions and reactions to supply and demand shocks (I):  ‘External Shocks’: Eurozone, East Germany  ‘Internal Shocks’: individualisation, mobility  Wages: efficiency wages, weakening unions  Regulation: some deregulation, vices and virtues of employment protection

9 What explains Germany’s success and failure? Institutional conditions and reactions to supply and demand shocks (II):  Welfare state: main concern is cost side  Labour market policies: misused for parking  Education & skills: exclusion of low skilled  Political economy: high interest in status security Weak: public investment; financing welfare state Strong: vocational education; social partnership

10 Main reforms in German employment policies  Promoting business start-ups for unemployed  Promoting minijobs, midijobs and temporary jobs  Activating unemployed through workfare plus...  Improved job matching through modernised PES  Merging unemployment and social assistance Weak:activating and merging Ambivalent:marginal and temporary jobs Strong: business start-ups

11 Lessons to be learned: I General Lesson: Why flexicurity systems?  Institutions ensure negative and positive freedom demand and supply perspective  Negotiated flexicurity negotiated flexibility, negotiated flexicurity  Flexicurity options good practices in Denmark and Germany

12 Lessons to be learned: II Specific lessons:  Self-employment as stepping stone to entrepreneurship or regular employment  Modernisation of employment services job matching and employability measures  Flexibilisation through variable contracts minijobs, midijobs, temporary work combined with new securities

13 Lessons to be learned: III Lessons through failures (1):  Avoid fragmented responsibilities Establish accountable administrative structures  Don‘t cut short-term unemployment benefits and expenditures on active labour market policies Both have to be considered as investments  Don’t neglect effective demand Keynesian demand management still valid

14 Lessons to be learned: IV Lessons through failures (2):  Don’t burden the shoulders of workers too much Broaden income base for financing social security and make work pay  Don‘t set unrealistic full-employment goals Broaden the opportunity set of employment in the lifecourse and make transitions pay