What Can We Learn from the German Labor Market Miracle? Employment – Global and Country Perspectives NYU Stern - ICRIER New York September 28, 2011 Holger Bonin Centre for European Economic Research (ZEW)

Recent German Labor Market History according to the Board of Economic Advisors 2004 Employment decline stops, but labor market remains in desolate state 2005 Continue on the reform path! 2006 On the way to higher employment 2008 Again good news from the labor market 2007 Good news from the labor market 2009 The labor market dragged by the severe recession 2010 Surprisingly good labor market development despite the crisis 2011 ???

The German Miracle...

... started before the Crisis Unemployment Rates

... started before the Crisis Unemployment Rates

2005 is the Turning Point Employment

2005 is the Turning Point Employment

The Reform of 2005 – „Agenda 2010“ „From now on, we will not allow anybody to sit back and do nothing, we will sanction those who reject reasonable work...“ Chancellor Schroeder

Principles of the Agenda 2010 Evidence based policy making „Promoting and Demanding“ Faith in the functionning of markets

Specific – Good – Measures Unified system of social welfare for the long-term unemployed Benefit cut after one year for those previously employed „Employable“ status for those previously on social welfare Joint responsibility of local municipalities and Federal Labor Agency Uniform benefit rules for all short-term unemployed Benefit cut for those close to – early – retirement

Specific – Good – Measures Concentration on effective active policies Support of occupation-related learning Subsidization of entry wages Support of self-employment Competition among employment services

And some Things that have NOT been Done Promotion of numerical flexibilisation Rather strict emplyoment protection legislation remains Regulation of temporary work sector Promotion of wage flexibility Collective agreements often binding for units not involved in bargaining Minimum wages by collective agreement even on the rise

Structural Effects GermanyEast Germany West Germany Unemployment Rate Vacancy Rate

Structural Effects – Focus on the Elderly Inflow Rates into Unemployment Age Age 56 and older

Favorable Auxiliary Conditions Activation Policies targeting the elderly and women Labor Force Participation Rates Women Age Percent

Favorable Auxiliary Conditions Activation Policies targeting the elderly and women Co-operative industrial relations Pension reforms raising effective retirement age Development of day care institutions

Co-operative Industrial Relations Unit Labor Costs

Favorable Auxiliary Conditions Activation Policies targeting the elderly and women Co-operative industrial relations Pension reforms raising effective retirement age Development of day care institutions for children younger than 3 Long period of moderate wage growth Opening clauses allow flexibility at decentralized level A well-trained labor force – apprenticeship training as the norm Productivity gains through firm-specific knowledge and long tenure A – relatively – safe harbor for the youth

Agenda 2010 – and Next? Current changes of labor market policies paradigms Germany is opening for immigrants Development of cognitive and non-cognitive skills as pre-emptive labor market policy Current Threats Labor supply shortages in certain areas Demographic change Introduction of a general minimum wage?

What can We Learn from the German Labor Market Miracle? Underneath Germany’s labor market performance is true structural change, result of bold reforms and wage restraint. Germany relies on an internal numerical and functional flexibility model. Cooperative industrial relations and well-educated employees support this scheme. The success would not have been possible without the establishment of a low wage sector by putting more pressure on the less qualified.

What can We Learn from the German Labor Market Miracle? Institutions matter. Market orientation, customer orientation and quantitative targets of labor agencies help. Centralization – combined with local knowledge – has advantages. Program evaluation matters. Set clear outcome targets. Concentrate on programs with a proven effect. Allow trial periods for new measures. (Dis-)Incentives matter. Rethink unemployment benefit and early retirement schemes.

What can We Learn from the German Labor Market Miracle? Implementing fundamental reform requires an opportunity. In Germany a scandal initiated the process, which helped decision makers to obtain initial backing. Structural reforms, even if they are successful, are politically risky. The Schroeder government was not re-elected. Political marketing matters. German reformers failed heavily on the communication side.