The economy was doing poorly in the mid-2000s, with unemployment rates reaching up to 11%. Then, between 2003 and 2005, a series of bold reforms pushed workers into the job market and this led to strong growth in employment. The unemployment rate fell rapidly, and even during the Great Recession there was only a temporary blip upwards. By 2018, the unemployment rate had fallen to the 3% to 4% range. What country am I describing? If you said Germany, you’d be correct:
In response to the dismal labour market performance, in 2003-2005 the German government implemented a number of wide-ranging labour market reforms, the so-called Hartz reforms. 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. Overall, the Hartz reforms constitute one of the most ambitious attempts in recent history of restructuring the labour market of an advanced economy.
An unpopular success
Figure 1 suggests that the Hartz reforms were quite successful. Between 2005 and 2008 the unemployment rate fell from almost 11% to 7.5%, barely increased during the Great Recession, and then continued its downward trend reaching 5.5% at the end of 2012. This view is shared by many economists in Germany and confirmed in our recent macroeconomic study of the Hartz reforms based on a calibrated search model (Krebs and Scheffel 2013). Specifically, we find that the Hartz IV reform reduced the non-cyclical unemployment rate in Germany by 1.4 percentage points. We further find that the Hartz I-III reforms decreased the non-cyclical unemployment rate in Germany by 1.5 percentage points. Thus, our analysis suggests that the entire reform package let to a permanent reduction in the German unemployment rate by almost three percentage points!
On the other hand, if you said Israel you’d also be correct:
When Mr Netanyahu was finance minister between 2003 and 2005, he was largely credited with rescuing the Israeli economy from the impact of the second intifada, which saw investment, tourism and business appetite shrivel under a spate of suicide bombings. Government expenditure soared because of security costs.
He nearly halved subsidies for the unemployed and cut child assistance payments, pushing people into the job market. He continued a privatisation drive that he had kick-started in his first run as prime minister in the mid-1990s.
Intellectuals will tell you that these are cruel neoliberal policies, despite their success in reducing unemployment:
In contrast, Italy has not reformed its labor market and has double digit unemployment. A study by Andrea Ichino and Johanna Posch of the European University Institute, Tito Boeri of Bocconi University and Enrico Moretti of the University of California, Berkeley compared Italy to Germany:
Nearly 350 national industrial agreements cover the vast majority of firms and formal employees in Italy. They take little account of regional differences in the cost of living and productivity. . . .
Wage bargaining in Germany, by contrast, was decentralised soon after unification. The authors find that earnings there are nearly four times as responsive to changes in regional productivity as those in Italy. Wages in the east are much lower than in the west, reflecting lower productivity and lower living costs.
The authors reckon a similar system in Italy could bring 2.5m more people into work, amounting to an increase of 13 percentage points in the employment rate in the south. Average earnings would be up to €114 ($129) higher a month. But southerners already in jobs would need to take a pay cut of 6%. That is no vote-winner. Greece, Portugal and Spain introduced similar reforms—but only after sovereign-debt crises. Instead Italy is launching a “citizen’s income” in the hope of reducing poverty and unemployment in the south.
PS. Don’t take this post as an overall endorsement of Netanyahu, despite the fact that I agree with his economic views.
READER COMMENTS
Thrawn
Apr 8 2019 at 2:05pm
Alan Goldhammer
Apr 8 2019 at 7:59pm
I’m skeptical of the Israel data since there are large numbers of ultra-Orthodox Jews who do not work and are heavily subsidized by the State. This state of affairs exists because their political parties are required for any coalition government. One also wonders whether Israeli Arabs are included in this data set.
Matthias Görgens
Apr 9 2019 at 12:51am
You should be skeptical if the number of those ultra Orthodox increased in proportion to the total population.
If it decreased or stayed the same proportion, the graph above is still impressive.
Cliff
Apr 9 2019 at 11:26pm
They certainly have increased as a proportion of the population
Yaakov
Apr 10 2019 at 3:27pm
Ultra-Orthodox Jews who do not work are not counted as unemployed, as they are not seeking a job, but rather are studying.
They are not heavily subsidized by the State. Yes, they do get from the government a monthly stipend of about $200, but that does not carry very far. Generally, their wives work and support them. In addition, they do not own cars and they live in cheap apartments. I would estimate the years they spend studying as about 10 more than their non-orthodox contemporaries. Then they go out to work, partly so that they can support their large family and partly to put forward money to buy apartments for their children when they marry. In summary, once the child subsidy was reduced to a low flat level (about $55 a month) the subsidies are not that large. The main subsidies that still exist are free schooling and healthcare. These are not due to pressure from ultra-orthodox politicians, but rather by progressives who ignore the fact that it is basically a subsidy to their political rivals.
As to the Arabs, the men work like the jews, although the join the workforce at younger ages and leave at younger ages. Since many live in paternal clans, the head of the family can be supported by his children when he retires. The level of employment among arab women is very low, but it is slowly rising as the arabs modernize. Their birth rates have been falling steadily since the cut in the child subsidy and the girls are getting higher education and joining the workforce.
Matthias Görgens
Apr 9 2019 at 1:01am
During unification the West German unions had pushed for a Hochlohnpolitik (high wage policies) in the East. They feared new low cost competition.
In the end, we got decades of high unemployment in the East. In the early 2000s it was averaging at above 20%. Roughly twice the abysmal average of about 10% for the whole country Scott quoted.
Even now the East has about twice the unemployment rate as the West.
(But about 7% for the worst performers today is way better than the 10% average we used to have.)
Phil H
Apr 9 2019 at 3:37am
This was really interesting, thanks. I went and read up a bit on the Hartz reforms, and was wondering whether there is a minimum wage in Germany. Wikipedia told me:
“…a study from the London School of Economics and Political Science …demonstrating that the minimum wage did not actually lead to job losses… the unemployment rate decreased in regions with previously lower wage levels”
Mark Z
Apr 10 2019 at 12:40am
Did they find the minimum wage had a positive effect on income?
Phil H
Apr 10 2019 at 3:38am
Hi, Mark.
Just having a look. Wiki says:
“a study of the German Institute for Economic Research showed that the minimum wage increased the hourly wage, but not the total income of people who work in the low-wage sector. Since hourly wages increased slightly, working hours decreased simultaneously to offset higher costs”
So that’s an increase in utility, but not in income.
LSE says: “The fact that we observe policy-enforced increases in wages without job losses implies that workers were paid below their marginal product…the policy…appears to have led to some reduction in inequalities across individuals and regions. It does not seem to have caused unemployment or outmigration”
Those sound to me like moderate positive effects, with very few negatives.
I don’t see minimum wages as a huge issue, I have to say. In Britain they seemed to have a mildly positive effect about 20 years ago. Apparently in Germany it was the same.
The main reason I argue for them is primarily that I find the arguments against minimum wages to be anti-empirical (and somewhat moralistic).
Mark Z
Apr 11 2019 at 12:10am
I’d say I argue against them for similar reasons.
Phil H
Apr 12 2019 at 9:53am
OK! That sounds like a good basis for going forward.
Yaakov
Apr 10 2019 at 3:36pm
In Israel there was a campaign for raising the minimum wage and Netanyahu gave in and even took credit for rasing the minimum wage. The higher minimum wage did not reduce employment, probably because wage growth was higher, so that the minimum wage is still lower or about at the natural wage rate in most sectors. Before rasing the minimum wage, which is now about $8 an hour, it was getting very hard to find workers who would be willing to work for the minimum wage.
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