The German job miracle: an interview with IAB Director Joachim Moeller
conducted by Hannah Ormerod
Hannah Ormerod: Professor Moeller, thank you so much for taking the time to talk to us today about the German labour market. The first topic that I want to discuss with you is this issue of the so-called German job miracle. Economists and political commentators from abroad talk about this German job miracle. Are they right to do so?
Prof. Joachim Moeller: I think that many labour market researchers were really surprised by the response of the German labour market to the great recession in 2009. And this also included me, I was surprised, because we thought with a minus of GDP of 5.1 at that time this should have big response at the labour market in terms of higher unemployment and less employment. And what really happened – there was almost no response of German firms to that huge shock in GDP. And then, of course, in the end all miracles can be explained and should be explained, and we relatively easily found out what was the reason for this response. It was labour hoarding to a huge extent; of course, it was supported by the short-time work schemes, which is a speciality of the German labour market institution that worked extremely well in the situation. The second was the existence of working time accounts: when people work less, then they can take hours free. We have this very positive trend. And there were several reasons for that. For example, I think that one main reason for the favourable situation of the German economy is that the product mix is at the moment on high demand on the world markets. We are producing machinery, infrastructural equipment, high-quality consumer goods – and these products are on high demand at the moment, and so we have this relatively favourable industrial structure. Also the fact that we have a relatively strong manufacturing sector in Germany is favourable to this situation. The other factors are that unit labour costs are relatively low over the years in Germany – during the last years, there has been relatively strong increase in wages; but in the decade before, we had low wage increases and productivity increases, so that the unit labour costs were relatively favourable in international comparison. And I think the final factor is that we are profiting from the weak euro, and this makes our goods at the world market more competitive. So, in one sense of the other, we are to some extent also profiting from the crisis of the euro. In some sense.
Hannah Ormerod: To what extent did the so-called Hartz reforms which took place between 2002 and 2005 contribute to the German job miracle? What are the guiding principles of the Hartz reforms and what are the greatest impacts on unemployment in Germany?
Prof. Joachim Moeller: I think that the Hartz reforms were really important for the German labour market. The basic principle is very simple: it is “sticks and carrots” or, in the language of the labour market reformers, it is supporting, for example, giving the opportunity for training courses to become more qualified, or giving subsidies for mobility to accept a job in another place. That is the supporting side. The demanding side, on the other hand, was also relatively hard for the employees putting some pressure on accepting jobs, for example. I think it was one of the elements. And the other element was that the maximum duration of unemployment benefits was reduced. This, of course, meant that after one year, typically, an unemployed person fell back to a very low position – decline in social status, so to speak, because then he or she could only get means-tested benefits. This threat was very effective, not only for the unemployed, but, I think, also for the employed persons that thought about avoiding to become unemployed. In the end, this mixture of supporting and demanding was relatively effective.
Another element of the reform was to make the labour administration more effective, for example, to introduce measures of new public management into the system. Today if you come to a labour market office – a labour office of a labour agency – then it is a completely different world than it was 15 – 20 years ago. You do not have the feeling of a really old administrative institution, but a modern and effective one. I think that was also one element that contributed to the success of the reform.
I suppose it is quite interesting if you look at the history of the reform. Why the reform? Schröder [former Chancellor of Germany] fathered the reforms and could not accept that unemployment – the trend in unemployment – was rising over time. And if you go back to the early 1970s, when the German economy was characterised more or less by full employment, then, after each recession – the first oil price shock and the second oil price shock – the unemployment number increased by more than one million in Germany. And it did not go back afterwards, so it stayed. Thus, it was an increase in, one could say, systemic unemployment. And when the expectation was at the unemployment after the turn of the century to hit the five million mark, it was not acceptable anymore. This is also very important to know that the German system of social security depends on the contributions of the employees and the firms. And if employment goes down or unemployment goes up, then the basis of financing the social system is not there anymore, and this was a measure to keep the system alive. Otherwise, it would have collapsed. In my opinion, this was one of the reasons to accept these, one has to say, hard reforms – hard for the workers, and some of the, for example, unions have still not accepted what was going on at that time. And there is still some opposition against it, but one has to say, from the labour market point of view, the reforms were successful – full stop. Now we have much less unemployment than in 2005; the number of persons that are eligible to social contributions rises from year to year. So, it is really a very favourable situation we are in today.
Hannah Ormerod: And is the success of the German labour market sustainable in the long run?
Prof. Joachim Moeller: That is a good question. We have one decade of very favourable development. I think that the conditions are quite good also for the future, but the German model is heavily depending on the export markets, and we have high uncertainty how these export markets develop in the future. Well, that could be really a challenge for the German system, and I think it is extremely important that we keep the qualification of the workforce at high level. And perhaps we also need a little bit more of flexibility, mobility also between firms – I think we are very good at in-firm flexibility, but we are not so good at, say, structural changes, as some firms close or others are newly founded. I can imagine that in the future we will have to do a little bit more on this sort of flexibility.