In 2002, Chancellor Gerhard Schroder appointed a jobs council headed by Volkswagen’s Peter Hartz to solve Germany’s high unemployment. In 2011, President Barack Obama similarly appointed a jobs commission headed by General Electric’s Jeffrey Immelt to achieve the same goal. (At the time, Schroeder headed the SPD, the equivalent of America’s Democratic Party.) Germany’s labor market turned around in a dramatic fashion after Schroeder implemented the Hartz Commission’s sweeping reforms between 2002 and 2005. In contrast, Obama’s Immelt Council quietly disbanded without making substantive proposals, and America’s worst jobs recovery of the postwar period continued. Obama cannot duplicate the German reforms. They reject his Keynesian belief that jobs are created by government stimulus. Instead, the Hartz reforms rest on the common sense notion that people take jobs when work, rather than welfare, pays. Such an approach violates Obama’s core beliefs. Government must make the lives of the unemployed as comfortable as possible. No, the Germans say. If the state gives too much, the unemployed will have no incentive to take jobs, even when they are available. Just as Germany alone pushed back against the anti-austerity complaints of Southern Europe, so it rejects the Keynesian blame of deficient demand for unemployment. Instead of stimulus, the Germans raise incentives for unemployed workers to take jobs. They believe that welfare programs must be calibrated to “make work pay.” Otherwise able-bodied persons will be tempted to take the easy way out of pay without work. The Germans would characterize President Obama’s “jobs program” of fiscal stimulus and generous and extended unemployment benefits as well-intentioned medicine that kills rather than cures the patient. They would laugh off the Obama team’s odd notion that higher unemployment benefits create jobs by putting money in the pockets of the unemployed. Surely, Obama can’t be serious. Germany’s labor market reforms have made Germany’s economy a rare bright spot in a troubled world: While German newspapers headline: “Germany on the Way to New Full Employment,” the rest of Europe records a 12 percent unemployment rate, and the United States settles for a “new normal” of high unemployment. Posters in German subways are full of job offers, while Spanish, Italian, and Greek workers take to the streets to protest the lack of jobs. A German political cartoon shows a well-groomed executive sweeping the factory grounds for lack of employees. The origins of Germany’s labor-market turnaround dates back to the mid-1990s, when its ruling class decided that things could not continue to go on this way. A humiliated Germany, of “Wirtschaftswunder” fame, had joined the rest of Europe in recording double digit unemployment rates, peaking at 13 percent in early 2005. The fabled German engineering machine was sputtering and needed new life. Chancellor Gerhard Schroeder called for labor market reforms in his 1995 “Agenda 2010.” He appointed a reform commission, headed by Peter Hartz, the head of personnel at Volkswagen. Hartz and his fellow commissioners were ordered to devise a plan for reducing unemployment and restoring German competitiveness. Unlike the United States where grand bargains are talked about and then forgotten, the Hartz reforms were actually implemented first by Schroeder and then by his successor Angela Merkel of the Christian Democrat Party. The fourth and final phase of the Hartz reforms went into effect in 2005 under Merkel. Within less than a decade, Germany halved its unemployment rate, while the rest of the Euro Zone remained stuck with double-digit unemployment. Prior to “Hartz IV” – as the Germans call it -- Germany was noted for its generosity to those without jobs. Unemployment benefits preserved as much of former earnings as possible. Unemployed workers could turn down jobs that did not correspond to their specific qualifications without losing benefits. (Taxi drivers could refuse jobs as truck drivers). The unemployed could refuse jobs that required a change of location. Unemployed workers received unemployment checks alongside generous welfare benefits. The unemployed even received money for their vacations. “Hartz IV” turned Germany from one of the most generous welfare and unemployment systems into one of the stingiest. Workers who lose their jobs receive unemployment benefits based on their previous earnings and time on the job for six months to two years. Once unemployed workers exhaust their regular unemployment benefits, they enter the Hartz IV program. (Germans use “Hartz IV” to describe the long-term unemployed who are in the program, often derisively, as well as the program itself.) If you have never been employed, such as a graduating student, you go immediately into the Hartz IV program. Hartz IV recipients receive about $400 per month for living expenses. Their rent and health insurance are paid directly by the state, subject to limitations on square meters of living space. If a “Hartz IV” turns down job offers, he or she stand to lose part or all their benefits. In addition to the $220 per month of “children’s money” that all families receive, a “Hartz IV” receives a monthly supplement of about $130 per child. With these benefits, a single unemployed woman with one child has less than $750 per month for expenses, after the state directly pays her rent and health insurance. Unlike other unemployment insurance programs, the Labor Office (renamed the “Jobs Center”) considers the Hartz IV recipient’s “need community” (Bedarfsgemeinschaft in bureaucratic German). A spouse or a partner with earnings reduces benefits according to a published formula. A recipient sharing a common refrigerator also can experience reduced benefits because basic needs are being met by others. Hartz IV recipients must go through a complicated bureaucratic procedure to replace essential household items such as a refrigerator or television set. The Labor Office conducts unannounced inspections to check for the presence of other adults or other signs of unreported earnings. The Germans devised the Hartz IV system to limit benefits to a subsistence level of living. The only way to rise above subsistence is to work. Once the chronic unemployed reach retirement age, they switch from Hartz IV to a state pension. In effect, Hartz IV recipients put their lives in receivership to the omnipresent Jobs Center. Hartz IV recipients are allowed to keep a maximum of $13,000 in savings. Any savings over that amount must go to pay their expenses before they can receive Hartz IV money. The Hartz IV program increases jobs and “makes work pay” for the low-skilled by taking advantage of Germany’s lack of a minimum wage. Hartz IV recipients who take “Ein Euro jobs” that pay one Euro per hour keep their entire earnings without losing benefits. They can also take so-called mini jobs earning $530 per month or more with a graduated loss of benefits. Of course, the Hartz IV reforms are not universally popular. The labor unions hate them as does the “Party of the Left.” A female Jobs Center employee became a folk hero, when she refused to reduce the benefits of a Hartz IV recipient who had broken its “barbaric” rules. The most remarkable feature of the Hartz reforms is that the German political class had the courage to make hard choices. Gerhard Schroeder’s support for labor market reform was the equivalent of Nixon going to China. Only a Social Democrat could push through such a reform. It cost his party two elections as his angry left wing (including Germany’s Teddy Kennedy, Oskar Lafontaine) split from the Social Democrats to join splinter parties. The American political class should look to Germany for two reasons: First, Germany provides a natural experiment of Keynesian versus Non-Keynesian labor market policy. I would challenge those continuing to push stimulus in the United States as an answer to unemployment (versus raising incentives to take jobs) to explain the halving of Germany’s unemployment rate in such a short time. Second Germany is a lesson in political courage – to do the right thing regardless of the political consequences. Such courage is sorely lacking on both sides of the aisle in the United States. Few if any American politicians have the courage to risk the demagoguery that would accompany their support for lower welfare or unemployment checks. For Obama to support such a program would be selling his soul to the devil.
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