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Reforms Undercut the Rights of Germany’s Unemployed

How to reform the labour market is one of the most discussed issues in Russian society. Germany introduced major labour market reforms in the 2000s and is one of the few countries that has achieved significant results in doing so. The German experience is worth looking at, even though it may not be directly applicable to other countries. Here are some findings made by researcher Nina Vishnevskaya of the HSE Centre for Labour Studies

Rapid changes in the economy usually lead to changes in the labour market. "Labour market reform has become a hot topic for many countries, including Russia," notes Vishnevskaya in her paper 'Labour Market Reform in Germany: a One-off Case or a Model to Follow?'.

According to the Rodolfo Debenedetti Foundation, 14 European countries made a total of 868 amendments to their labour laws between 1980 and 2007. The purpose of many amendments was to liberalise the labour market. However, according to Vishnevskaya, most countries have not achieved significant institutional change. She describes it as "two steps forward, one step back." But Germany is a special case. German policymakers picked a good time for reform, acted decisively, and within a short time succeeded in curbing unemployment and increasing demand for the workforce.

The Timing of Reform

Why would one of the most economically successful EU countries need an institutional reform of its labour market in the first place? Vishnevskaya cites a few economic and political reasons which had prompted the German government to look for new approaches to labour market regulation.

Reunification exacerbated many pre-existing problems. The government's social welfare liabilities placed a massive burden on the budget. Welfare tax in Germany was 16% in 1980 and reached 43% in 2000. The country's economic structure was dominated by industry while the service sector was underdeveloped. Employment was low, lagging behind the leading countries by 7% to 10%, and unemployment was on the rise.

The country's various political forces recognised the need for reform, and the time was right for change in the early 2000s, when "serious misconduct was exposed in the German employment service," explains Vishnevskaya.

Fighting Unemployment By Encouraging Precarious Employment

The labour market reform in Germany began in 2003 and was completed in record time after three years. Top priorities included fighting unemployment and creating new jobs.

Above all, the government revamped its policy towards the unemployed by giving preference to those who wanted to be helped and could be helped by employment agencies.

The relationship between employment agencies and the unemployed changed in a major way, in particular the screws were loosened on the former principle that employment agencies must fit applicants with jobs identical to those they had before. Instead, a new definition of 'suitable employment' was introduced, and a 20% difference in wages between the former and the new employment could no longer justify the applicant’s rejection of a job offer.

Changes also affected Germany's unemployment insurance system which used to be one of the most generous in Europe in terms of amounts and duration of payments. An unemployed German was entitled to a basic unemployment benefit at 67% of the former salary paid for 18 months after losing his/her job. The reform reduced the duration of the unemployment benefits to 12 months and canceled the possibility for receiving benefits for an extra year at 53-57% of the former salary. Moreover, the amount of unemployment benefits could be reduced for someone who was not actively looking for a job. "As a result, the unemployment insurance contribution rate dropped from 6.5% to 2.8% of the taxable wages," Vishnevskaya notes.

The reform also allowed employers to create jobs with reduced or zero welfare and income tax liabilities – the so-called mini-jobs and midi-jobs, which in 2010 provided employment to 7 million people, or 12% of the total workforce.

In addition, the government provided more options for precarious employment, in particular, by lifting restrictions on temporary employment agencies and by expanding legal grounds for fixed-term contracts.

Determination Is the Main Lesson of the German Experience

The German labour market reform created new jobs, encouraged employment, and reduced unemployment and labour costs. But there was a certain asymmetry to the reform, says Vishnevskaya. While the country's labour market has become more flexible, employees on long-term contracts are still protected against dismissal both by the labour law and by collective bargaining agreements.

"The downside of this practice is a decline in productivity and growing labour costs during crisis when production goes down but the workforce remains the same," Vishnevskaya notes. She believes that the policy of preserving the 'core' of the country's employment hinders the flow of the workforce to better performing industries.

It is unlikely that the German experience will work for Russia. "Countries may share many aspects of their reforms, but individual differences remain and merit careful study rather than copying," notes Vishnevskaya.

She believes that policymakers in other countries should be inspired by the German example, in particular by the political will and determination of implementing the reform.

 

Author: Marina Selina, January 22, 2014