Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany



Performance of Active Labour Market Policy in Germany

context, and (b) by the fact that many measures affect every worker, i.e. no
comparison group exists. First results of these evaluation studies have become
available just now.

In this paper, we describe the economic and institutional context of the
German labour market before and after the reform. Focussing on active policy
measures, we delineate the rationale for reform and its main principles. We use
the most recent empirical evidence to discuss the effectiveness of key el-
ements of German ALMP before and after the Hartz reforms.

The paper is organized as follows: Section 2 gives an overview of the German
economic situation since unification in 1990, briefly characterizing the prob-
lematic features of the East and West German labour markets. We also de-
scribe the institutional framework before Hartz, focussing on active labour
market policies and the organisational structure of public employment
services, and discuss the main weaknesses of the institutional setting that mo-
tivated the reform. Section 3 delineates core elements of the Hartz reforms
and the reform strategy in some detail. In Section 4 we review both the
hitherto existing and the most recent evidence from evaluation research to
assess the effectiveness of active labour market policy before and after the
reform. Section 5 concludes.

2. Economic Situation and Labour Market Institutions before Hartz

Since the 1990s, Germany has shown to be unable to benefit from favourable
conditions in the global economy. From 1991 until 2003 GDP grew by only
18%, which is half the growth of the United Kingdom (35%) or the Neth-
erlands (34%) during that period. Low growth rates have been unable to
create employment. Employment even slightly decreased (by 0.4%) and un-
employment rates are higher than ever, currently ranging between 9.6% in the
West and 18.6% in the East.

Certainly the unification in 1990 and its repercussions have contributed to
Germany’s poor performance. Unification suddenly increased the labour
force by roughly one third of workers, a large share of which was inadequately
trained for immediate employment in an open market economy. Despite the
need to first retrain the labour force and reshape the formerly centrally
planned economy, however, it was a core political objective to adjust East
German wages to the comparatively high West German levels as quickly as
possible. In contrast to other Central and Eastern European transition
countries having competitive wages levels to create sustainable growth, the
East German economy experienced rising unemployment and continuing de-
pendence on federal subsidies and transfer payments from West to East.
Apart from the high fiscal costs of unification, the Maastricht criteria reduced
the government’s scope for expansive growth policies further.



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