Labor Market Reform. The Hartz Experience. Dr. Michael Jung, Brussels, June 15, 2013

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3 Labor Market Reform The Hartz Experience Dr. Michael Jung, Brussels, June 15, 213

4 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

5 EUROPEAN LABOR MARKETS HUGE DISPARITIES 1 Relative position of most countries from stable 2 Vacancy rate = Number of job vacancies divided by total number of jobs SOURCE: Eurostat 4

6 EUROPEAN LABOR MARKETS HUGE DISPARITIES SOURCE: ESPON 5

7 YOUTH UNEMPLOYMENT IN EUROPE Share of Jobseekers 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 6

8 YOUTH UNEMPLOYMENT IN EUROPE Share of Age Cohort 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 7

9 HARTZ REFORMS THE PREVAILING VIEW Germany 22: Amidsthigh and risingunemployment a national crisis the Schröder Government defines an ambitious reform (Agenda 21) for labor market policy Germany 25: Reform programsareimplementedin Theirimpactishuge. Unemployment after a 5 millionpeakin 25 falls drastically. Germany 29: Despite a severe crisis-driven downturn, employment provesresilient. And itcontinuesitsbuild-up, in stark contrastto soaring unemployment across Europe. Europe 211: German Labor Market Reform isseenas a modelfor strategieselsewhere a supplysidecatalystof growth in a contextof fiscal/financial consolidation 8

10 ... OR, IN MORE ARTICULATE WORDS, THELRB OF JUNE 6:... the gigantic, unforeseen costs of unification brought Germany to a halt in the 199s. 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 deregulating reforms which downsized welfare payments and, above all, liberalised the labour market curtailing unemployment benefit, abolishing protection for the low-paid and encouraging employers to offer short-term jobs. Unemployment at first soared, then began to fall steadily. Export industry recovered. Growth accelerated again. The rich grew richer, while the lower working class women especially began to encounter 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 been violated, perhaps beyond repair....agenda 21 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) 9

11 TURNAROUND GERMAN LABOR MARKET: EMPIRICAL EVIDENCE 5, Unemployment in Germany (Thousands, Average/Year) 4, 3, 2, SOURCE: Eurostat 1

12 EUROPEAN LABOUR MARKET PERFORMANCE: COMPARISON Unemployment rate % Italy France UK Germany SOURCE: Eurostat 11

13 HARTZ PROGRAM PROFILE FORCE AND FACILITATE Hartz I: Job Creation (23) Hartz II: Job Flexibility(23) Hartz III: Service Quality (24) Liberalizing temporary employment Upgrading training programs Mini & Midi Jobs Supporting self-employment Organization of public services& processes Service performance metrics& monitoring Hartz IV: Benefits Redesign(25) Shorter insurance coverage(limit 12 months) Thereafter: integrationof insurance& welfare 12

14 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 ) 13

15 REFORM IMPACT:... YET PROBABLY NOT KEY FACTOR IN LABOUR MARKET TURNAROUND... Critical trends vs. reform implementation -exports -laborcost - German country business model - favourable macro context German business culture: continuity and change Labor market parameters: proportions& statistics 14

16 GERMAN EXPORTS: STRONG MOMENTUM SINCE LATE 9 S 1,2 German Exports EURbn 45 European Exports Share of GDP % Germany 1,1 4 1, Italy 5 2 France UK SOURCE: IHS Global Insight 15

17 LABOR COSTS GERMANY, EUROPE Unit Labor Costs Manufacturing, Germany Nominal, 1991 = 1 17 Unit labor Costs Overall Nominal, 199 = 1 UK Italy France Wage Increases Metal Workers, Germany Nominal, % 13 Germany SOURCE: Federal Statistical Office Germany; Eurostat; European Commission; Hans-Böckler-Stiftung 16

18 EMPLOYMENT PATTERNS: STRUCTURAL CHANGE Germany: traditional vs. flexible employment Million Long-term employment contracts 4 35 Part-time vs. full-time employment Part-time in % of full-time UK 76 Participation rates % UK Germany Temporary Part-time Self-employed Marginal employment Germany France Italy France Italy SOURCE: Eurostat; Federal Statistical Office Germany 17

19 COUNTRY BUSINESS MODELS Share Manufacturing Sector % of GDP Germany Italy UK France Financial & Building Sectors % of GDP UK France Italy Germany SOURCE: IHS Global Insight 18

20 ...STUBBORN PERSISTENCE OF ETERNAL ISSUES 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 incomecoveringtotal costof life 19

21 POLITICAL ECONOMY: INTERVENTION PARADIGM? A. Economic repair: Implementing the right technology : monetary, fiscal, structural B. Societal choice: Redesign and adaptation of political, cultural, economic profiles Crisis interventions aimed at key macroeconomic outcomes: debt, growth, employment. Economic performance is rooted in complex background system: deep structures in context Policy levers influence market conduct (fiscal and monetary) and structure (rules and governance) Targeted technical intervention is successful when addressing pivotal bottlenecks only then. 2

22 DEEP STRUCTURES IN CONTEXT Economic Profile Context: Global & Technology Dynamics Expansive/contractive Stable/volatile Business Model Products, Markets Networks/Connectivity Material/external Governance/Institutions/Values Mindset/Leadership/Ideas Stability Flexibility Energy Growth Resources & Assets Politics& Culture Natural Human Financial&Material Trust & Values Institutional Capacity Convergence & Leadership 21

23 FUNDAMENTAL CHOICES, CHANGING ENVIRONMENT Fundamental Policy Choices Change: Known Unknowns 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 2

24 EUROPEAN LABOR MARKETS HUGE DISPARITIES SOURCE: ESPON 23

25 OECD MAKING THE BELGIUM LABOUR MARKET MORE INCLUSIVE Brussels, 15 June 213 By Jens Høj, OECD Economics Department Based on the OECD Economic Surveys of Belgium 211 and 213.

26 A more inclusive labour market is a key to boost employment rates A. Total TUR HUN ITA SVK POL CHL ESP GRC ISR MEX IRL EST BEL KOR FRA OECD CZE LUX PRT EU15 SVN USA FIN JPN GBR DEU CAN AUT NZL AUS SWE DNK NLD NOR CHE ISL B. Men HUN EST ISR IRL SVK POL ESP TUR BEL ITA FRA SVN FIN PRT GRC USA EU15 CHL OECD LUX CZE KOR CAN SWE GBR DNK DEU AUT NOR NZL MEX AUS JPN NLD ISL CHE C. Women TUR MEX ITA CHL GRC HUN SVK KOR ESP POL CZE IRL BEL OECD ISR LUX EU15 FRA JPN EST PRT USA SVN GBR DEU AUS AUT NZL FIN CAN NLD SWE DNK CHE NOR ISL

27 The low employment rates are concentrated among younger and older workers Employment rate per age group 3

28 Youth have poor employment prospects after leaving school Expected number of years spent in employment during the five years after leaving school 5 4 Total Low-skilled² TUR HUN GRC CZE ITA SVK PRT MEX BEL ESP OECD USA LUX POL NZL SWE FIN GBR FRA CAN DEU AUT CHE DNK ISL AUS NLD 4

29 Workers with immigrant background have low employment rates, irrespective of education National citizens Other EU citizens Non EU citizens Low skilled Medium skilled Highly skilled

30 % Open unemployment rates are not particular high, but.. A. Youth unemployment: age 15-24, 211 % % NOR KOR CHE AUT NLD JPN LUX AUS MEX ISR 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 NLD CHE JPN AUT DEU NOR KOR MEX AUS 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 % B. Total unemployment, 211 C. Share of employees on reduced working time schemes POL PRT NZL USA CAN DNK KOR NOR AUT NLD FRA SVK HUN ESP IRL CHE CZE FIN JPN LUX DEU ITA BEL

31 Long-term unemployment is prevalent A. Six months and over 21Q4 27Q ISL NOR SWE DNK TUR FIN AUT SVN NLD GBR POL FRA CHE EU15 ESP ITA DEU GRC BEL EST CZE PRT IRL HUN SVK B. One year and over 21Q4 27Q3 NOR ISL SWE DNK TUR AUT SVN FIN NLD CHE GBR POL FRA ESP EU15 CZE GRC ITA DEU EST BEL HUN PRT IRL SVK

32 Is the labour market ready for the population ageing? The share of +65 over working age population 8

33 The low effective retirement age is part of the problem Retirement ages 9

34 The early retirement reform improves working incentives, but more must be done The 212 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 1

35 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

36 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

37 However, labour demand is hampered by high tax wedges 13

38 And high statutory minimum wages MEX JPN ESP CZE TUR USA KOR LUX CAN NLD OECD POL HUN PRT SVK GRC GBR IRL AUS BEL NZL FRA (as a percentage of the median wage)

39 And a wage formation process that has not prevented export market losses Export market shares 15

40 Main recommendations for further labour market reforms Boost labour demand: reduce sectoral minimum wages to the legal level concentrate social security contributions cuts on lowwage 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 16

41 Measures to improve labour market access for youth and immigrants 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 17

42 Thank you! Dank u wel! Merci! Danke! Mange tak! 18

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