Lena Jacobi and Jochen Kluve
Only a small share of overall German unemployment is thought to be attrib-
utable to business cycle factors. Some studies argue that the German NAIRU
has increased over the past decades (e.g. Franz 2001), indicating that structural
factors play an important role in the German unemployment problem.
Figure 1 shows the development of unemployment and the number of partic-
ipants in training and job creation programmes for West and East Germany
during the time period 1991 to 2005. We observe a general increase in the
number of unemployed individuals in both parts of the country. Whereas in
West Germany the number of programme participants has been relatively
stable over this period, decreasing only slightly, the figures for East Germany
document the massive use of ALMP measures during the early 1990s and a
substantial decrease over recent years.
Labour market institutions
Compulsory unemployment insurance was introduced in Germany as early as
in 1927, complementing the then already existing insurances for health, ac-
cident and old age. After World War II a generous benefit system, financed by
contributions and taxes, emerged. Active labour market measures were in-
troduced when unemployment started to rise in the 1970s. Both active and
passive policy measures are administered by the federal employment office. In
earlier years, when unemployment was still low, measures were designed to
prevent rather than fight unemployment, adapting the workforce to structural
changes in labour demand. After unification in 1990, active labour market
measures played a central role in alleviating the social consequences of the
breakdown of the economy in East Germany. In 1991, one third of the East
Germany workforce had participated in an active measure, mainly training
and public job creation schemes (Wunsch 2005).
The set-up of active and passive labour market policy in Germany during the
1990s can be characterised as follows: From the very beginning, unem-
ployment benefits were meant to maintain the worker’s social status during
unemployment rather than providing a safety net of last resort. All payments
made to the individual over the entire period of unemployment were linked to
his or her previous earnings. Unemployment benefits, which were paid for the
first 6 to 32 months of unemployment (depending on previous employment
duration and age), amounted to 67% of the last net income (60% without
children), with a maximum level of 4 250 € per month. Unemployment as-
sistance, which was paid thereafter without time limit, still reached 57% (53%)
of the last net income.
The unlimited duration of unemployment benefit payments was an extraor-
dinary feature of the German unemployment benefit system, leading to re-
placement rates for long term unemployed which were higher than in any
other OECD country (OECD 2004). Replacement rates of short-term unem-