German labor market reform

Yesterday's New York Times had a lengthy article detailing Germany's broad-based economic recovery and accompanying decline in unemployment. Delving deeper into the improved employment picture, the article gives substantial credit -- devoting eight paragraphs -- to a government program known as "short work" (Kurzarbeit) in which employee wages are subsidized. Then, near the article's conclusion, appears this paragraph:

German wage growth, though, has been nearly stagnant for the last decade, in part because companies increasingly used temporary workers during periods of high demands. Major cuts in unemployment benefits also increased the incentive for people with fewer skills to take low-paying jobs. The changes, in 2005, were the beginning of the turnaround in the job market but are still a sore point with labor representatives.

Hold on a second, the beginning of the turnaround in the job market dates from the adoption of these labor market reforms? Talk about burying the lede! Doesn't that suggest these reforms were kind of a big deal? Isn't this worth exploring in a little bit more depth? Unfortunately the Times declines to provide any more information, simply going on to quote an upset union spokeswoman in the following paragraph.

Intrigued, I decided to dig around and found this article from Der Spiegel:

What has contributed to Germany's revitalization most of all was a treatment prescribed by former Chancellor Gerhard Schröder. "The Agenda 2010 reforms are part of the reason Germany is doing so well today," says [Bert Rürup, chairman of the German Council of Economic Experts].

While the package of reforms, which Schröder's coalition government of Social Democrats and Greens launched in 2003, certainly did not trigger the upswing, it did help to jumpstart the economy when the global economic boom finally reached Germany.

One of the triggers was the reform that combined unemployment assistance and welfare payments into a new entity known as Unemployment Benefits II. "The incentives to work have increased, especially for the qualified unemployed," says Dennis Snower, president of the Kiel Institute for the World Economy (IFO).

As a result, the number of unemployed Germans declined much faster than during previous upswings. Since the beginning of 2006, 1.6 million people have been stricken from the unemployment rolls. But what is most significant is the fact that, for the first time in decades, the number of job seekers is smaller than during the previous boom. Even at its height, more than 3.8 million people were still looking for work. In December 2007, the number had declined to only 3.4 million, which was much smaller than expected.

Wikipedia expands on these reforms, the most notable of which is the Hartz IV reform that went into effect on January 1, 2005:

Prior to 2005, between 12 and 36 months (depending upon the claimant's age and work history) of their full unemployment pay (60 to 67% of the previous net salary) were followed by Arbeitslosenhilfe (unemployment benefits, 53 to 57% of the last net salary). Since 2005, reception of full unemployment pay (renamed Arbeitslosengeld I), has been restricted to 12 months in general and 18 months for over 55 year-olds. This is now followed by (usually much lower) Arbeitslosengeld II if the claimant fits the requirements (see next paragraph).

The wikipedia entry also notes that, as a condition of being eligible for benefits that "unemployed persons may be forced to accept any kind of legal job."

Germany, then, has made unemployment less attractive and is now experiencing less unemployment. Coincidence?

Related: I would also urge that readers check out this post from the Economix blog entitled "Eurosclerosis Comes to America" as well as this Mark Perry post as companion reading material.