Hartz Reforms and Their Lessons For The Uk

The Hartz Reforms
…and their lessons for the UK
GLYN GASKARTH
THE AUTHOR
Glyn Gaskarth is the Director of Right Resource Consulting Ltd.
He has written for CIVITAS and served as Special Advisor to then
Shadow Home Secretary David Davis MP.
Acknowledgements
I would like to thank John Winter for his generous support for this paper, Tim
Knox for his comments on the text and Tamara Chehayeb Makarem Gaskarth
and Susan Gaskarth for their support during the compilation of this report.
Support towards the publication of this study was given by the Institute for
Policy Research.
The aim of the Centre for Policy Studies is to develop and promote policies that
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ISBN No. 978-1-906996-31-4
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CONTENTS
Summary
1. Introduction 1
2. Germany Strikes Back: The Hartz Reforms 13
3. Trouble Ahead: Threats to the Reforms 43
4. What Can Be Learnt from the German Experience? 52
Bibliography 61
STYLISTIC NOTE
The full title of the body set up to propose reform of the
German labour market was the Committee for Modern Services
in the Labour Market. This body is commonly referred to as the
Hartz Commission after its chair Peter Hartz. The reforms
became known as the Hartz Reforms. Consequently this paper
refers to the Hartz Commission and the Hartz Reforms
throughout rather than using the official bureaucratic terms.
SUMMARY
• Only a few years after German reunification, the German
economy began to stagnate. Between 1994 and 2002, it grew
by less than the EU average. The GDP growth rate was only
1.6% between 1995 and 2001.
• One of the key problems with the stagnating economy was

the high unemployment rate. 13.4% of the German population
(including those in labour schemes) were unemployed in
2002.
• Additionally, the German welfare system was seen to be

notably over-generous to claimants. This resulted in
employers shifting work abroad to find cheaper labour and
unemployed persons having no incentive to find work.
Ultimately, this led to a reduction in the demand for labour in
Germany.
• In 2002, German Chancellor Schröder convened a

Commission under his friend Peter Hartz (the Personnel
Director of Volkswagen) established to reform the labour
market, and address the high unemployment rate.
• Following the Hartz Commission’s recommendations, four
reforms called the “Laws for Reform of the Job Market,” (or
Hartz Reforms) were enacted in stages between January
2003 and January 2005. These new laws included:
- the creation of Personal-Service-Agentur to act as temp

agencies to place unemployed people with employers;
- a grant for entrepreneurs, known as the "Ich-AG" (Me,

Inc.), to encourage new businesses;
- benefit cuts of up to 30% if a person on unemployment

benefits refused to take up a reasonable offer of work;
- merging social welfare benefits with long-term

unemployment benefits.
• Though the reforms were largely unpopular, they are

credited with creating 2.5 million jobs for the German
economy and helping the German labour market remain
strong through the recession.
• Currently, in the UK, both Conservative and Labour Parties

are discussing reforms to wages and benefits. Reforms are
necessary, but politically unpopular. The Hartz Reforms can
serve as a lesson for the UK by showing how this policy
needs to be carefully designed and slowly implemented.
1. INTRODUCTION
“The biggest economy in the euro area, Germany’s, is in a
bad way. And its ills are a main cause of the euro’s own
weakness.”
The Economist, 3 June 1999
In the 1998 German Federal Election, Social Democrat Party

(SPD) Chancellor Gerhard Schröder was elected in coalition with
the Green Party. In his election campaign, he had promised to
reduce the number of Germans registered as unemployed from
4.2 million to 3.5 million within four years.
Three years later little had changed. The Chancellor’s own

Council of Economic Advisors (CoEA) issued a scathing
assessment of the state of the German economy in their 2002
Annual Report. A member of the CoEA, Horst Siebert, declared:
“Germany is no longer the economic locomotive that it used to
be. The economic engine seems to be stalling… weakness of
1
economic growth is one of the characteristics of today’s
Germany.”1
The German economy had indeed been in the doldrums for

some time. With a GDP growth rate of 1.6% a year between 1995
and 2001, it had grown by less than the EU average and two
percentage points a year less than the US.2
The headline rate of German unemployment was 8.7% in 2002.3

And if the 1.7 million in labour schemes were included, the real
unemployment rate was 13.4%.4 This compared to a rate of 8.3%
in France, 8.5% in Italy and 5.1% in the UK.5 In 1970 the
unemployment rate in West Germany had been just 0.7%.6
German reunification: intensifying, not causing, the problem

German reunification was often cited as a cause of the German
problems. The substantial fiscal transfers necessary to repair
the damage imposed by East German Communism did impair
economic growth but the European Commission estimates that
German reunification was responsible for only one third of the
differential rate of growth compared to the EU average.
1
Kiel Institute for the World Economy, Germany – The stalling economic
engine, 9 December 2002.
http://www.ifw-kiel.de/das-ifw/organisation/siebert/siebert-pdf/stalling.pdf
2
Kiel Institute for the World Economy, op. cit.
3
European Commission, Eurostat, Unemployment Rate 2001-2012.
4
5
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=Fil
e:Unemployment_rate,_2001-
2012_(%25).png&filetimestamp=20130627102805
6
2
Some mistakes were made. For example, converting East
German Marks with the West German Mark at a rate of 1:1
inflated the value of the East German Mark by 400%. Controlled
for productivity, wages in East Germany were equivalent to 130%
of West German wage rates. However, reunification initially gave
the German economy a significant boost. German GDP grew by
5.7% in 1990 and 5.0% in 1991.7
The level of structural unemployment in West Germany had

been growing since the 1970s. Horst Siebert, a member of the
CoEA, explained how: “In each recession, roughly one million
were added to the unemployed in Western Germany, and the
high unemployment was not reduced during the boom years in
a noteworthy way so that the next recession started from a
higher level of unemployment. With unification, the structural
unemployment problems in Eastern Germany were added.”8
Welfare: a hammock more than a safety net

The previous welfare system was notably generous to claimants.
It had been designed to maintain the unemployed in their
current social station until they could find a job they desired,
and which matched their qualifications and experience.
Benefit levels were high and were of long duration (see Table 1).
The Federal Labour Office (FLO) gave a low priority to job
search assistance and monitoring. Sanctions for failing to meet
job search requirements were rarely applied. Linking
unemployment benefits to the former salary set a high de facto
7
8
Ibid.
3
minimum wage, meaning there was little incentive for the
unemployed to find work.
A newly unemployed person who had made contributions to the

social security system would receive unemployment benefits for
the period for which they had earned an entitlement. To qualify
for unemployment benefits (until the 2005 changes) the
claimant had to have worked 12 months in the previous three
years. Once this ran out they would go on unemployment
assistance. This was also linked to their former wage but paid
for out of general taxation. This could be supplemented by
welfare benefits to ensure an adequate income. Sickness
benefits were also linked to former salary and paid at a high
percentage for an extended duration.
Social insurance that shortened individuals’ working lives

Because unemployment benefits were linked to contributions,
there was little stigma attached to claiming them. One think-
tank commented that: “the German unemployment benefit
system guaranteed constant and high compensation streams
(up to 32 months) for elderly workers.”9
9
Ralf Wilke, Stephan Dlugosz and Gesine Stephan, Fixing the Leak:
Unemployment Incidence Before and After the 2006 Reform of
Unemployment Benefits in Germany, Centre for European Economic
Research December 2009.
http://econstor.eu/bitstream/10419/29636/1/61581140X.pdf
4
Table 1: Benefits in Germany before the Hartz Reforms
Description Duration Amount
67% of the
Varied previous
Linked to worker
with age income for
Unemployment contributions
but went unemployed
benefits and paid to the
up to 32 with one
unemployed.
months. child; 60% for
the childless.
Began when 57% of
unemployment previous
benefits run out. wage in
Unemployment This was means- cases of a
Indefinite.
assistance tested and worker with
financed from one child;
the federal 53% for the
budget. childless.
70% of the
lowest wage
in the
Means-tested industry
benefits to sector.
ensure decent
Welfare benefits condition of life. 100% of the
For a married lowest wage
worker with one professional
child. in low-paid
sectors e.g.
service
industries.
100% of
Limited to 78 First six
previous
weeks in a months:
Sickness gross wage.
three-year
benefits 80% of
period for the After six
same illness. previous
months:
gross wage.
5
The minimum age to receive 32 months of unemployment
benefit – the maximum duration of unemployment benefits –
was raised to 57 years old in 1997.10 However, unemployed
citizens over the age of 57 continued to be able to stop their job
search and withdraw from official unemployment status and still
receive unemployment benefits. The elderly used these benefits
as a “popular bridge between the exit out of regular
employment and the entry into old age pension. Unemployment
incidence was high among older workers with long tenure, and
their labour force participation rate was also exceptionally
low.”11 Unemployment rates for the elderly rose to between 20%
and 25% in the mid-1990s.12
High social security taxes sapped the desire to work

The welfare system was financed through social security
contributions. Half were made by the employer and half by the
employee. This reduced the incentive to work by creating a
sizeable tax wedge between the gross wage financed by the
company and the net wage received by the worker. When
combined with income tax, workers on an average income
faced a tax and social security charge of 58% if they were
married and 67% if they were single.13 Of the 58 percentage
points of income paid by married workers, 34 percentage points
were due to social security.14
10
Ralf Wilke, Stephan Dlugosz and Gesine Stephan, op. cit.
11
Ibid.
12
Ibid.
13
14
Ibid.
6
Employers responded by shifting lower-value roles abroad and
using cheap capital to invest in technology. Both these responses
contributed to a reduction in the demand for labour in Germany.
The decline in the working age population also began to put
stress on the social security reserve fund. It was reduced in 2001
from one month to 0.8 months; and in 2002 to 0.5 months.15 With
low immigration levels and a low birth rate, the German system of
social security looked unsustainable in the long term.
Marginal work was severely regulated

The German labour market was inflexible as well as expensive.
German labour law stipulated that a worker could only diverge
from a union-agreed contract if this was favourable to the
worker (for example, increased pay or shorter hours). The
German courts did not include job security or economic
competitiveness as a legitimate reason to alter contracts.
Alterations were also not allowed if the original union-agreed
contract did not allow for deviations in such circumstances,
even if the majority of workers accepted them. Temporary work
contracts were limited to two years and employers were
prohibited from offering a second temporary contract to the
worker after the two years if they did not also offer them the
option of a full-time contract.
Hiring individuals for start-ups in new sectors or work in cyclical

industries was particularly difficult as workers had come to
expect the prospect of secure employment.
Corruption in government discredited previous approach

In addition to the onerous employment regulations, the OECD
also explained how corruption and incompetence in the FLO
15
7
created an urgent need for that body to be reformed. The FLO
had been found guilty of falsifying its success rate at finding the
unemployed work. This body, employing 90,000 people, had
claimed it had found work for around 51% of the unemployed
cases it dealt with. In fact, it had only found work for around
18%.16 An investigation in February 2002 found that 70% of
employment cases were being mishandled.17 German Socio-
Economic Panel data indicated that in the early 2000s, 60% of
the changes in the unemployment rate were due to increases in
the “inflow rate” (i.e. the number of people in the workforce)
rather than changes in the “outflow rate” (i.e. more unemployed
people finding work).18 The OECD suggested that: “The parties
running the system arguably had little interest in reforming it,
since most of these training and other programmes were run by
the social partners themselves, who controlled around 60% of
the further education sector.”19
16
Deutsche Welle, Schröder Plans to Revamp Labour Office, 24 February
2002.
http://www.dw.de/schr%C3%B6der-plans-to-revamp-labour-office/a-
448171
17
Verena Di Pasquale, Federal Employment Service to be reformed,
European industrial relations observatory on-line, 4 April 2002.
http://www.eurofound.europa.eu/eiro/2002/03/feature/de0203204f.htm
18
Matthias S. Hertweck and Oliver Sigrist, The Aggregate Effects of the
Hartz Reforms in Germany, SOEP papers on Multidisciplinary Panel
Data Research at DIW Berlin, 21 December 2012.
http://www.diw.de/documents/publikationen/73/diw_01.c.414559.de/diw_
sp0532.pdf
19
William Tompson, The Political Economy of Reform: Lessons from
Pensions, Product Markets and Labour Markets in Ten OECD Countries,
OECD, 2009.
http://www.oecd.org/site/sgemrh/46190166.pdf
8
Klaus Zimmerman of the Institute for Labour explained how
“assignment to programs [was] based on the caseworkers’
discretion” with “no systematic individual profiling” or
“systematic evaluation.”20 This provided the impetus to establish
an ad hoc body outside the traditional corporatist structures –
the Hartz Commission – to investigate the problem of high
unemployment.
What did the SPD do about unemployment in its first term?

Between 1998 and 2002, the SPD/Green Party Coalition reversed
some of the minor labour market reforms implemented by the
previous administration of CDU Chancellor Helmut Kohl: job
search requirements for the unemployed were relaxed and
employment protections for staff of small firms were
strengthened. Labour Minister Walter Riester in 1999 drew up
plans to end an exemption that reduced the tax and social
security contributions due for employing those 6 million workers
in low paid jobs which were known as ‘DM360 jobs’. The German
Chamber of Commerce estimated these plans could cost
500,000 jobs.21 Subsequently these plans were dropped.
A corporatist solution?
Chancellor Schröder reconvened an “Alliance for Jobs”. Its first
meeting was in December 1998 and included representatives
from trade unions, employer organisations and the Government.
It was designed to achieve consensus-based reform.
20
Klaus F Zimmerman, Structural reforms and the functioning of the
Functioning of the Labour Market, Institute for the Study of Labour (IZA)
and University of Bonn, LAC-EU Economic Forum 2013, 22 January 2013.
21
The Economist, “The Sick Man of the Euro”, 3 June 1999.
9
However it failed to accomplish this. Trade Unions wanted large
companies’ boards to be included in the talks to make
agreements comprehensive and binding. Agreements made to
increase vocational apprenticeships and reduce overtime were
non-binding. Employers’ associations wanted wage policy
guidelines to be agreed in the meetings but trade unions
wanted to continue collective bargaining between trade unions
and companies on an industry basis. In the run-up to the 2002
Federal Election, it even stopped meeting (there was no
meeting between January 2002 and December 2002).22 The SPD
included a call for a continuation of the Alliance meetings in its
manifesto but side-lined the body after their re-election.23
A new supply-side approach

The left of the SPD and the trade unions argued that the root
cause of high unemployment was insufficient demand. In
August 2002 there were 1.4 million unemployed in East Germany
but only 76,000 job vacancies.24 The proposed solution was to
increase public spending to create demand. German public
spending as proportion of GDP increased to 48.6% in 2002 (it
had been 39.1% in 1970).25
22
Martin Behrens, Torsten Niechoj, Future of national Alliance for Jobs
under debate, European Industrial Relations Observatory On-Line, 7
January 2003.
23
Thorsten Shulten, Tripartite Agreement Establishes National Alliance for
Jobs, European Industrial Relations Observatory On-Line, 28 December
1998.
http://www.eurofound.europa.eu/eiro/1998/12/inbrief/de9812286n.ht
24
Lutz Kaiser, Sweeping Modernisation of Labor Market Policy Proposed,
European Industrial Relations Observatory On-Line, 23 September 2002.
25
10
This solution was surprising, not least as the case for more
government spending had been somewhat discredited as both
spending and unemployment increased in the 1990s. The OECD
had criticised the Active Labour Market Policies, in particular the
“extensive public subsidies for short-term work, public job
creation and further training.”26 These combined to create “a
secondary labour market characterised by lock-in effects, zero
(or even negative) post-participation effects and substantial
dead-weight losses.”27
There was no shortage in demand for labour – there were one

million vacancies unfilled and two thirds of employers said they
could not get the staff they needed.28 A black market in labour
existed and was estimated at 15% of GDP and generated
around €300 billion a year.29
The search for an alternative

Meanwhile, economic growth stagnated, state expenditure on
welfare grew and the unemployment rate, having initially fallen,
began to resume its long-term upward trend. This suggested
that the problem was structural (the product of labour market
policy) and not cyclical (the product of a temporary lack of
demand). Faced with discredited labour market reforms, and
probable imminent defeat in the 2002 Federal Elections,
Chancellor Schröder convened a committee (the Hartz
Commission) under his friend Peter Hartz, the Personnel
Director of Volkswagen, to propose reforms to the labour
26
William Tompson, op. cit.
27
Ibid.
28
Thorsten Shulten, op. cit.
29
The Economist, “A plan to put Germans back into jobs”, 22 August 2002.
11
market. Created in February 2002, its remit was to tackle the
single issue of high unemployment, in particular:
• how to reduce the average unemployment period from 33

weeks to the British level of 22 weeks, and thereby save
around €20 billion in benefit payments;
• how to reduce unemployment by half (from 4 million to 2

million) within three years.
The Commission delivered its proposals six months later just

before the September 2002 elections. The OECD later argued
that the Federal Elections helped build the case for the Hartz
Reforms. The Government had been elected on a promise to
cut unemployment, but unemployment had been rising sharply
from 2001. They described how: “…with elections approaching,
the government had to be seen to act decisively to stem the
rise in joblessness, particularly since it had been elected on a
promise to cut unemployment.”30
This strengthened the arguments of “modernisers” in the

governing SPD who favoured labour-market reform. The
Chancellor fully endorsed the Hartz Commission proposals in
the 2002 Federal Election. The left of SPD and the trade unions
opposition was muted so as not to damage the SPD chances of
victory. Once elected, Chancellor Schröder claimed an electoral
mandate for the reforms.
30
12
2. GERMANY STRIKES BACK:
THE HARTZ REFORMS
The Hartz Commission was composed of 15 experts: two
academics (a law professor and a political scientist), two trade
unionists, one representative of an employers’ organisation,
representatives from management consultancies, company
boards and the Government.
Unusually in German politics, the composition of the Commission

was not about inclusion and consensus. The two most important
employers’ organisations – the German Confederation of
Employers’ Associations and the Federation of German Industry –
were not included, nor were the German Confederation of Trade
Unions nor the representatives of opposition parties, nor the
more traditionalist wing of the SPD, nor the Labour ministry. The
OECD commented that the composition “marked a striking – and
31
deliberate – departure from the tripartism of the Alliance.”
The Commission made recommendations in 13 areas which are

summarised below.
31
Ibid.
13
Table 2: Hartz Commission Recommendations
Reform of the BA
Job Creation Improved Placement
(Federal Labour Office)
Introduction of ‘Personal
Simplification of
Service Agencies’ in Creation of job centres
instruments for
each employment throughout the country.
promoting employment.
district.
Simplification of labour
law, use of advisory
Promotion of part-time teams, and introduction Merger of
employment in domestic of notification unemployment benefits
services (Minijobs). requirement for and welfare benefits.
dismissal and
resignations.
Introduction of self-
employment or family
More effective
employment as a new Expansion of availability
organisation of
form of labour supported of child day-care
workflows and control
by tax incentives and facilities.
activities at the BA.
grants for up to three
years.
Introduction of ‘Job Tightening the

Floater’ low-interest conditions under which
loans to encourage individuals could refuse
SMEs to employ job offers and the
previously unemployed institution of flexible
individuals. sanctions.
Promotion of training
Introduction of company
and employment for
employment ‘balance
young people, and
sheets’ and payment of
development of a
bonuses from the
“bridge” system of
unemployment
employment for older
insurance system to
persons involving grants
those with positive
to older workers who
employment
accept lower paid jobs
development.
or take early retirement.
14
These reforms were implemented in stages between December
2002 and January 2005 through the “Laws for Reform of the Job
Market” (known as Hartz I to IV).
Hartz I-II
Both Hartz I and Hartz II were introduced in December 2002 and
the main provisions are summarised below.
Table 3: Hartz I and II Reforms

Summary of Hartz I reforms
"Staff Services agencies" (Personal-Service-Agentur or PSAs)
were established all over Germany and these operated as temp
agencies to place unemployed people with employers.
A voucher programme for vocational education was introduced

to replace the previous contracting out scheme. This allowed
those selected to choose within an area of training decided by
their caseworker.
Subsistence payments began to vary according to an individual’s

ability to work as well as their previous contribution record.
Requirement for companies to register when they make a worker

unemployed or for the employee when they resign to give them
notice so job search can begin.
Requirement to take up ‘reasonable’ offers of employment or

provide a valid excuse – burden of proof transferred to the
unemployed to state why the offer is not reasonable and not the
caseworker to explain why it is attractive.
Reform of the law on Temporary Employment and Labour

Leasing to end the ban on renewing temporary work contracts
with new temporary work contracts.
15
Summary of Hartz II reforms
New types of employment, "Minijob" and "Midijob" were created.
These were short-term and part-time roles with higher thresholds
for taxes and social insurance payments for employees and less
worker protection to encourage employers to hire.
A grant for entrepreneurs, known as the "Ich-AG" (Me, Inc.) was

introduced, to encourage them to start a business and tackle the
existence of undeclared employment.
A rise in the number of job centres (their name was changed

from labour offices) and an emphasis on them becoming one
stop shops combining job search and welfare roles – aim to
replicate aspects of the UK job centres.
A more accountable Federal Labour Office

Training vouchers were introduced to help undermine the close
relationship between the FLO and the providers of training. This
was combined with a commitment to independent evaluation of
the impact of these reforms by independent research institutes.
Unemployed clients received a voucher which they could use to

pay for the training they sought. All programmes had to be
accredited and the scheme was assessed by independent
agencies to judge its success and suggest improvements. The
OECD believes this combination led to a “marked shift in
training patterns and outcomes.”32
These reforms also sought to create a nationwide network of

temporary work agencies, the Personal Service Agencies
(PSAs). These took over the role of the FLO with regard to
32
16
placing the unemployed who found it hardest to find work, e.g.
the young who lacked work experience or the long-term
unemployed who may have fallen out of the habits of work.
The PSAs were created by the state, but could be spun out to
become private entities undertaking contract work for the state.
Their responsibility was to place individuals referred by the FLO
in work. The PSA tender specified which hard-to-place target
groups it would specialise in and their fee would differ
according to prevailing local market conditions and the
characteristics of the unemployed individuals targeted. A PSA
initially received nine- to twelve-month contracts with a
declining monthly fee per case, paid by the FLO. In 2005 this
changed to six-month contracts with a set fee for the duration
(€500).33 A success bonus was paid when the individual was
placed in a job. In periods when the worker was not placed, the
PSA had to demonstrate they were increasing their
employability through training.
Among people assigned to the PSAs, the under 25s were

significantly over-represented compared to their share of the
unemployed population. The next most numerous user groups
were women and those in vocational education, though both
these groups were lower than their respective share of the
unemployed population as shown in Table 4, which also
includes the totals for the temporary work agencies.
33
Janine Leschke, Günther Schmid, Dorit Griga, On the Marriage of
Flexibility and Security: Lessons from the Hartz-reforms in Germany,
WZB Social Science Research Center Berlin, April 2006.
http://skylla.wz-berlin.de/pdf/2006/i06-108.pdf
17
Table 4: Selected socio-economic groups in labour schemes
PSA-average Share of all
TWA-average
from April to unemployed in
in 2002
October 2003 2003
Socio-economic
group
Women 27% 34% 44%
Foreigners 14% 10% 13%
Aged under 25 22% 33% 12%
Aged 50 or older 12% 11% 24%
Without vocational
46% 30% 34%
education
(Formerly) long-term
8% 14% 34%
unemployed
Health-related
Unknown 13% 28%
constraints
Source: WZB Social Science Research Centre Berlin
The PSAs were not considered to be a great success: between

April 2003 and December 2005 only 130,000 individuals entered
a PSA.34 The Social Science Research Centre, in its report The
Marriage of Flexibility and Security: Lessons from the Hartz
Reforms in Germany, suggested that the PSA element of the
Hartz Reforms suffered poor publicity, as it failed to achieve
inflated targets set by the Hartz Report and one of the major
contractors went bankrupt.35 In February 2006 the evaluation
report released to parliament on Hartz I–Hartz III recommended
the abolition of the PSA.36
34
Janine Leschke, Günther Schmid, Dorit Griga, op. cit.
35
36
Directorate General of the Treasury (France), How have the Hartz
Reforms shaped the German labour market?, No 110, March 2013.
http://www.tresor.economie.gouv.fr/File/386657
18
Legitimising the place of marginal work in the labour market
The trade unions viewed the creation of PSAs and the
expansion of temporary work as a threat to their membership.
Few temporary workers were members of trade unions. They
represented a reserve labour force that the unions feared could
be utilised to undercut unionised workers. To ease these fears,
the Government allowed the German Trade Union Federation to
engage in collective bargaining with the two main employers’
associations to form a separate legal arrangement for
temporary workers. Without this agreement, the existing law
would have required equal treatment for agency workers from
their first day. Between 2003 and 2006 the OECD observed a
70% increase in the share of temporary work as a percentage of
German employment – from a small base.37
Minijobs – A ladder to permanent work

At the insistence of the opposition-controlled Bundesrat
(Germany’s upper house and seat of Lander), Hartz II was
modified so that the earnings threshold for the “Minijobs” was
increased and the range of occupations that could be Minijobs
was expanded compared with the original Hartz Commission
proposals. Previously it was to be confined to domestic services.
Minijobs paid a rate of 10% social security contribution compared
to the 22% average.38 The 15-hour limit on marginal employment
was abolished.39 From 2003 to 2004 the number of Minijobs
increased to 6.64 million.40 The Social Science Research Centre
37
William Tompson, op cit.
38
The Economist, op. cit., 22 August 2002.
39
40
Ibid.
19
estimates that around half of these people were either young
workers under 20, individuals over 64 usually supplementing
another income or people with a second job.41 The maximum
earnings for a Minijob were raised from €325 to €400.42 Up to this
maximum, the employer paid social security contributions and
employees still earned an entitlement to retirement insurance.
Midijobs – preventing a disincentive to work

To prevent a huge increase in taxes at the €400 mark Midijobs
were created. Past €400, the employee paid a reduced rate of
4% of earnings as social security increasing to 21% for a weekly
wage of €800.43 By December 2003, 670,000 workers were
registered as Midijobbers.44
It has been suggested by the Social Science Research Centre

that, as German tax law allows couples to submit joint tax returns,
many married couples did not see the benefit of the lower-paid
person registering as a Midijobber, even if they were earning
within the Midijob earnings range of €400 to €800 per week.45
Private households were allowed to claim 10% of the Minijobs
cost against their taxable income and paid a reduced rate of 12%
in social insurance contributions.46 This encouraged families to
formalise domestic jobs such as cleaning and childcare, etc.
Declared marginal employment in private households doubled
41
Ibid.
42
Ibid.
43
Ibid.
44
Ibid.
45
46
Ibid.
20
between 2005 and 2006.47 The Social Science Research Centre
found that three quarters of Minijobbers and 84% of Midijobbers
were women, two thirds of their spouses were employed and the
majority were middle-aged.48 Surveys of the reasons for
individuals entering Mini- and Midijobs showed that a third did so
to improve their work-life balance.49
Table 5: Demographics: the Midi- and Mini-job

Spouse Receiving Average
Woman Married
employed transfers age
MiniJob
73% 72% 66% 27% 47 years
(n = 2,445)
MidiJob
84% 64% 67% 16% 42 years
(n = 576)
Source: WZB Social Science Research Centre Berlin
Encouraging self-employment and small start ups

The unemployed were encouraged to set up their own
companies under the Ich-AG legislation (“Me Inc.” in English).
They could earn up to €25,000 a year taxed at a 10% rate plus a
requirement to pay welfare contributions.50 Ich-AGs were mostly
formed in the services, construction, trade, craft and IT sectors.51
The Ich-AG allowance was paid as an annual lump sum
decreasing to zero over three years.52 From the second year of
operation, this allowance just covered social security
contributions. Those that stopped receiving the allowance could
47
Ibid.
48
Ibid.
49
Ibid.
50
The Economist, op. cit., 22 August 2002.
51
52
Ibid.
21
still receive unemployment assistance and benefits because
they had continued making welfare contributions. This reduced
the disincentive to engage in self-employment. This became a
type of part-time work particularly favoured by women
supplementing existing family income. By September 2005,
236,000 citizens were in receipt of an Ich-AG allowance.53 Until
2005 Ich-AGs were not required to create a business plan. This
was later seen as a mistake, as some businesses were created
without adequate preparation.54
The Hartz III Reforms

The Hartz III came into effect on January 1, 2004. These
proposals aimed to cut unemployment benefit for those who
turned down a job; and reformed the FLO.
Table 6: Hartz III Reforms - summary of proposals

FLO renamed the Federal Employment Agency (FEA). Ratio of
case managers to beneficiaries was lowered, FEA embraced
internet and renamed an ‘agency’ with ‘clients.’
Provision to allow a 30% benefit cut if a person on
unemployment benefits refused to take up a reasonable offer
of work.
Merged job creation and structural adjustment measures into
one scheme and reduced the maximum duration.
Access to unemployment insurance benefit was tightened,
with the minimum prior contribution period changed to 12
months in the previous two years compared with 12 months in
the previous three years formerly.
53
Ibid.
54
Ibid.
22
Sanctions for those unwilling to work
Cuts to social security were controversial not least as
Chancellor Schröder had opposed cuts in his 2002 Federal
Election campaign. His unpopularity grew and Chancellor
Schröder resigned as SPD Party Chairman in February 2004.
The new reforms also meant that single people would be

expected to take a job anywhere within Germany. If a job offered
20% less than their former wage, they would still have to accept
it. The job applicant would have to convince the labour office that
the job was not suitable. It was not the task of the labour office to
convince the job seeker the role was worthwhile. Those under 25
could have their employment benefit stopped entirely. Those who
refused jobs could lose up to 30% of their benefits.55
How did these reforms link in with Agenda 2010?

Chancellor Schröder announced an “Agenda 2010” programme of
tough supply-side reform in March 2003. He declared that, “in the
future, no-one will be allowed to rest at the expense of society.
Anyone who refuses reasonable work, can expect to face
sanctions.”56 Social security contributions were cut as were the
basic rate and top rate of income tax (the former by almost 25%,
from 19.9% to 15%; the latter by 48.5% to 42%).57 Income tax
receipts fell by almost €22 billion.58
55
CESifo Group Munich – Center for Economic Studies, DICE Report
2/2005.
http://www.facoltaspes.unimi.it/files/_ITA_/EPS/ochel_2005.pdf
56
Deutsche Welle, op. cit., 9 February 2010.
57
Deutsche Welle, A Quick Guide to ‘Agenda 2010’, 17 October 2003
http://www.dw.de/a-quick-guide-to-agenda-2010/a-988374-1
58
Ibid.
23
The Government financed these measures by selling
government properties and reducing federal subsidies. The
rules requiring mandatory apprenticeships and master
craftsman diplomas were also relaxed to allow tailors and
goldsmiths without these qualifications to enter the marketplace
and compete. Health Insurance Premiums paid by employers
from their gross wage were also reduced in stages from 14.3%
in 2003 to 12.15% in 2006.59 At the same time, the Rürup
Commission, looking at the viability of the social insurance
system, advised increasing the age of pension eligibility from 65
to 67, and reducing the percentage of the recipients’ former
income from 48% to 40.1%.60 A rival commission set up by the
Christian Democrats backed increasing the retirement age to 67
and also advocated a flat healthcare premium.61
The Hartz IV Reforms

Hartz IV merged social welfare benefits, which guaranteed a
minimum income, and the long-term unemployment benefit that
began when unemployment I contributory-based benefits
expired, into a new unemployment benefit II. This meant lower
payments for recipients. Instead of receiving 57% of their former
income, benefits were capped at €345 in West Germany and
€331 in East Germany.62
59
Deutsche Welle, op. cit., 17 October 2003.
60
Ibid.
61
Ibid.
62
CESifo Group Munich, op. cit.
24
Table 7: Hartz IV Reforms - summary of proposals
Unemployment benefits and welfare benefits were combined
into one single lower payment entitled Unemployment
Benefit II. Previously unemployed German workers could get
half their previous salary in benefits while they were out of
work indefinitely, could turn down jobs that did not match
their specifications or that required a change of location.
Those never employed immediately went on to this scheme;
those previously employed receive benefits linked to their
previous wage for a period up to two years and then went on
Hartz IV. Individuals with savings in excess of €13,000 had to
exhaust the excess before they could receive Hartz IV
benefits. To receive payment the claimant must sign a
contract. This outlined what they were obliged to do to
improve their job situation and the help the state agreed to
provide.
The claimant could be required to take any type of legal job
or face reduction or elimination of benefits. The Labour
Office authorised to conduct unannounced inspections to
check for the presence of other adults at the claimant’s
abode or other signs of unreported earnings to ensure
correct welfare benefits payments.
The administrative work of the Federal unemployment office
and local welfare offices were combined. The Federal Labour
Agency had responsibility for the new Unemployment Benefit II.
A new programme for getting the unemployed into non-

private work sector was introduced. Known as one-euro jobs,
they paid €1 an hour for work in the public interest and the
recipient kept their Unemployment Benefit II.
25
Individuals with a working spouse and/or assets over €13,000
euro had their eligibility for this benefit reduced or eliminated
respectively.63 These reforms had unfortunate unintended
consequences: they effectively encouraged families to split up
and claim as separate households, they punished families
where one spouse worked and they disincentivised saving
among the working poor.
A new benefit was introduced of €359 a month (not including

rent). This combined a series of benefits that previously had to
be applied for separately into one single flat-rate benefit.
Allowances for the children of the unemployed were also
reduced, with children between 7 and 13 years of age being given
60% of the adults’ allowance; and those between 14 and 17 years
of age receiving 80%.64 In October 2009, 1.7 million children were
receiving Hartz IV allowances.65
The job centre also considered the recipient of Hartz IV benefits

‘need community’ which included parents, spouses or any
recipient sharing a fridge with the benefit claimant.66 They did
this to detect those whose basic needs might be being met by
another. The Labour Office was able to conduct surprise visits
to check for undeclared earnings or undeclared residents in the
recipients’ home. The regulation even meant that recipients of
the benefit could have to go through a bureaucratic procedure
63
Paul Roderick Gregory, Why Obama Cannot Match Germany’s Jobs
Miracle, Forbes, 5 May 2013.
http://www.forbes.com/sites/paulroderickgregory/2013/05/05/why-
obama-cannot-match-germanys-jobs-miracle/
64
Ibid.
65
Ibid.
66
Ibid.
26
to replace a TV or refrigerator, as the benefits were means-
tested and not meant to provide more than the minimum.67
Shared responsibilities of Federal and Local Governments

Local welfare offices continued to administer housing and
heating benefits. Granting social assistance to those unfit to
work remained with the municipalities. The local employment
office was responsible for ensuring that the recipient was
medically able to work.
The contract between the unemployed and the Federal Labour

Agency marked a change in their relationship. It clearly set out
the different parties’ responsibilities. The motto of the reforms
was the “right and duty principle.”68 It included sanctions in the
event of a failure to meet these aims. Eligibility for Unemployment
II benefits was dependent on signing such an agreement. A
March 2013 report for the French Ministry of the Economy and
Finance found that individuals with a four to six month contract
were 70% more likely to find work compared to a 30% rate for job
seekers with similar characteristics not in the programme.69
The lowering of the ratio of case managers to unemployment

benefit recipients enabled the counsellors to double the
amount of time they spent on individual cases and develop
more effective plans that were, in turn, more efficiently enforced.
67
Paul Roderick Gregory, op. cit.
68
CESifo, op. cit.
69
Directorate General of the Treasury, op. cit.
27
The creation of public interest employment
In 2005, “one-euro” jobs were created as part of the Hartz IV
reforms. There were 200,000 in the first year and this rose to
320,000 in 2009, before declining sharply in 2011 to 188,000.70
The aim of these jobs was to create a pathway to a permanent

job for those that were unemployed and on Hartz IV benefits.
They enabled individuals to become reacquainted with the
habits of work. Those who filled these roles continued to receive
their housing, health, heating and social security benefits. The
jobs paid between €1 and €2 an hour.71 The maximum working
time was 30 hours.72 Those employed for more than 15 hours a
week did not appear as unemployed in the FEO statistics.73
These roles were paid tax-free and were mostly charitable and
temporary work which had to have a public interest element to
prevent them undermining or substituting for ordinary paid
work.
The FEO offered the euro jobs to the unemployed and could
reduce their benefits if claimants refused to do them. There was
no contract of employment. A job-related plan detailed what
was expected of the individual. These roles usually lasted
between six and nine months. Employees were covered by their
employers’ insurance for workplace injuries.
70
Directorate General of the Treasury, op. cit.
71
Working-in-Germany, The One Euro Job.
http://www.working-in-germany.com/ein-euro-job-0132.html
72
Ibid.
73
Ibid.
28
Increased income inequality
These roles, along with reduced benefits and sanctions, have
significantly increased income inequality in Germany, even
though they reduced unemployment. An OECD report in April
2012 found that: “Germany is the only [EU] country that has seen
an increase in labour earnings inequality from the mid-1990s to
the end 2000s driven by increasing inequality in the bottom half
of the distribution.”74
They attributed the “wage moderation” to a weakening in trade

unions and “a set of reforms in 2003 meant to increase the
flexibility of the labour market.”75 A more profound reason for the
increase in income inequality is that individuals formerly paid a
high level of benefit linked to their former wage for being
unemployed, now received means-tested, low-value benefits
and were expected to work in low-remunerated roles to
maintain their right to these benefits.
The reforms and EU policy/EU law

The Hartz reforms were part of a wider reform policy called the
Agenda 2010 programme. This was an attempt by the German
Government to implement the EU Lisbon Strategy set out in
2000, which promised, by 2010, to make the EU: "the most
dynamic and competitive knowledge-based economy in the
world, capable of sustainable economic growth with more and
74
Kaja Bonesmo Fredriksen, Income Inequality in the European Union
Economics Department Working Papers No. 952, OECD, 16 April 2012.
http://search.oecd.org/officialdocuments/displaydocumentpdf/?cote=EC
O/WKP(2012)29&docLanguage=En
75
Ibid.
29
better jobs and greater social cohesion, and respect for the
environment."76
A draft labour law produced by the Ministry of Labour in 2003

stated: “This labour market reform contributes to the long-term
goal of achieving full employment… according to the objectives
of the EU employment guidelines… both the Job Activ Law and
the Hartz reforms (including Hartz IV) strongly resembled (and
referred to) EES [European Employment Service] guidelines”77
It also proposed merging insurance social assistance and

unemployment assistance. The European Courts did confirm the
legality of aspects of the reforms such as the ability of the
German Federal Minister of Economics and Labour to declare a
minimum wage in the public interest in particular sectors (2005).78
Thus, it might be expected that the reforms would not have had
trouble with the European Courts and the European
Commission. However, the European Courts and Commission
did request some alterations to the Hartz legislation. For
example, the Hartz reforms included a regulation specifying that
workers older than 52 (before, the age-limit had been 58) could
76
Deutsche Welle, op cit., 9 February 2010.
77
Sabina Stiller and Minna Van Gerven, The European Employment Strategy
and National Core Executives: Impacts on activation reforms in the
Netherlands and Germany, Journal of European Social Policy, 2012.
http://www.utwente.nl/mb/csd/research/Stiller%20en%20Van%20Gerven
%202012.pdf
78
Kurt Vogler-Ludwig (in cooperation with Simone Leitzke), Discussion
Paper: European Employment Observatory Germany, Job Summit
Promoting the Hartz Reforms Quarterly review of labour market trends
and policies, ECONOMIX Research & Consulting, 2005.
http://www.economix.org/EconomixQuarterlyReviewGermany1.pdf
30
be employed on the basis of a fixed-term contract without time
limit. It was declared void by the European Court of Justice
(ECJ) in 2005. The German Government was required to explore
the introduction of other flexible mechanisms to encourage
79
employment for those over 52 years of age.
The Hartz reforms began to move German welfare from a

generous and contribution-based system to a basic and
taxpayer-financed system. This created the issue of what
benefits non-German unemployed EU citizens would receive
under Hartz IV. The European Commission is currently seeking
to clarify the rights of intra-EU migrants. The Christian Social
Union (CSU) Chairman has declared it “heartbreaking how little
the EU Commission takes note of the reality of human life in
Europe,” fearing an influx of welfare tourists.80 The CDU/CSU
have sought to operate a three-month ban on such EU
unemployed migrants receiving social benefits. The issue of
immigrants’ access to Hartz benefits has been referred to the
ECJ by the Federal Social Court and this issue is awaiting their
judgement.81
79
80
Daniel Brossler, EU Commission presents guidelines, Sueddeutsche.de,
13 January 2014.
http://www.sueddeutsche.de/politik/sozialleistungen-fuer-zuwanderer-
eu-kommission-legt-leitfaden-vor-1.1862254
81
Roland Preuss, Brussels calls Hartz IV exam for unemployed migrants,
Sueddeutsche.de, 10 January 2014.
http://www.sueddeutsche.de/politik/eu-kommission-bruessel-fordert-
hartz-iv-fuer-arbeitslose-auslaender-1.1859619
31
The challenging creation of a government database
The OECD criticised the Government for the way the Hartz IV
law was introduced. It believed that “little was done to explain
the controversial Hartz IV reform either to the public at large or
to those who would be directly affected by it.”82
Demonstrations were muted until the government sent out a

questionnaire to 3.8 million benefit recipients to check their
eligibility to the new rules.83 These questionnaires asked about
claimants’ personal savings, dietary requirements, health
insurance and the income of other family members. The OECD
suggests that the form “frightened and confused many, and
gave rise to rumours and misconceptions about what the
reform would entail.”84 Combining the benefits required the
development of a large single database and expensive
software. The system kept crashing initially. However, a week
before the Hartz IV reform was to take effect, 94% of
questionnaires had been returned and 2.2 million households
had received their benefit statements.85
Merging unemployment and social benefits

The OECD explained how: “Rates of long-term unemployment
will generally be higher in countries where unemployment
benefits are relatively generous and are available for long
periods of unemployment. In countries where benefits are low
82
83
The Economist, “German Labour Market Reform: Hartz and Minds”, 29
December 2004.
http://www.economist.com/node/3522141
84
85
The Economist, op. cit., 29 December 2004.
32
and of limited duration, unemployed persons will more quickly
lower their wage expectations or consider taking jobs that are
in other ways less attractive than those which they formerly
held.”86
To increase the incentives to find work, the Government merged

the tax-financed second stage of Unemployment I Benefits with
social assistance benefits. This reduced the payments for many
recipients. This merger also boosted the number registered as
unemployed to above 5 million in February 2005,87 creating a
false impression that unemployment was going up.
The totemic figure of 5 million unemployed is credited with

inflicting some state election losses on the SPD in 2005. IMF
research indicates that the change to the official measurement
of unemployment added around 500,000 workers to the
unemployment rolls between January and March 2005.88
150,000 citizens attended marches to protest against the

passage of the reforms in 2004, but planned demonstrations for
3 January 2005, the day the reforms became operational, drew
only 700 protestors nationwide.89 A clear communications
campaign could have reassured those benefits recipients
86
OECD Factbook 2013, Economic, Environmental and Social Statistics.
87
William Tompson, op. cit. The increase in unemployment occurred
because many of the recipients of social assistance had not previously
been registered as unemployed.
88
Tom Krebs and Martin Scheffel, Macroeconomic Evaluation of Labor
Market Reform in Germany, International Monetary Fund 13th Jacques
Polak Annual Research Conference, 8-9 November 2012.
89
BBC News Online, German Benefit Protesters Contained, 3 January
2005.
http://news.bbc.co.uk/1/hi/world/europe/4142441.stm
33
affected and explained that the boost to unemployment
numbers was a statistical rearrangement and not an increase in
the number of real unemployed.
The impact of the new Grand Coalition

The Government that introduced Hartz I-IV was a Coalition
Government of the SDP and the Green Party, two parties of the
left. The main opposition parties were both aligned with the
right: the Free Democrats (FDP) and the Christian Democrats.
The CDU/CSU and the Liberal FDP controlled the upper house –
the Bundesrat – for much of the 2003-2005 period, and this
gave them an effective veto over the reforms. The Social
Democrat-led coalition had a small majority in the lower house
– the Bundestag.
In the 2005 Federal Election, a Grand Coalition of the CDU and

SDP was formed. In February 2006, the new Coalition
introduced a separate Labour Market Reform Act; this cut the
maximum period for claiming Unemployment Benefit I to 18
months.90 This represented a reduction of 14 months for those
aged over 56, an 8 month reduction for those between aged 55-
56, a 14 month reduction for those aged 52-54, a 10 month
reduction for those aged 47-51 and a 6 month reduction for
those aged 45-46. They did not affect individuals under the age
of 45. The new rules were effective for all those individuals that
lost their job after 31 January 2006.
This reform effectively reinstated a Hartz interim proposal aired

in June 2002, but dropped from the final report released in
August 2002 after substantial opposition.91 The effects of these
90
91
William Tompson, op, cit.
34
changes to Unemployment Benefit I are listed by age group
below.
Table 8: Maximum Entitlement Length for Benefits, in months

age group Until 1/2006 2/2006 to 12/2007 Reduction
< 45 12 12 0
45-46 18 12 6
47-51 22 12 10
52-54 26 12 14
55-56 26 18 8
> 56 32 18 14
Source: Centre for European Economic Research
The impact of the February 2006 reforms on older people

entering employment
In February 2006, the maximum entitlement period for
unemployment benefits was reduced. One report found: “A
considerable anticipation eﬀect just before the reform that led
to a peak in the inflow to unemployment during the winter
2005/2006. The size of this effect is surprising, as legal
regulations were designed to prevent exactly this anticipation
effect. Thus, our results suggest that legislation was not able to
fully absorb economic incentives to exploit the old system as far
as possible.”92
The authors of this paper examined the impact of the cut in the
eligibility period for benefits of up to 14 months, depending on
the age of the recipient.93 Between November 2005 and January
2006 the report identified an anticipation effect from the
92
93
Ibid.
35
reforms. For the average employee between age 57 and age 64,
the probability of transition to unemployment before the full
implementation of the reforms was 120% higher.94 Following the
reforms implementation, individuals between 57 and 64 were
20% less likely to enter unemployment than without the reform.95
Due to “the highly disputed reform” there was “a considerable
decline in unemployment incidence among older workers.”96
Their study involved a random sample of 2% of employees born
before 1970 aged between 40 and 64. It covered the period
between 2000 and 2007.
These reforms to unemployment insurance benefit were

accompanied by the abolition of a tax-free allowance up to
€11,000 for severance pay. As severance payments are linked to
tenure this was particularly costly for older workers.
These reforms rapidly encouraged older workers to remain in

employment. At the beginning of 2006, the 55 to 64 year old
age group represented nearly 15% of all unemployed. By the
end 2007, this had fallen to 9%.97
How were the reforms implemented so quickly?

The interim conclusions of the Commission were released by
Peter Hartz in June 2002 to test the public reaction, and the
final report was released in August, just six weeks before the
election in September. The OECD suggested that the report:
“…bore little resemblance to the prototype of a government
94
Ibid.
95
Ibid.
96
Ibid.
97
Centre for European Economic Research, op. cit.
36
report, in style, layout or structure: the summary read more like
a manifesto, ending as it did with an appeal to the
‘professionals of the nation’ to bring forward proposals to
reduce unemployment, and it appeared to be aimed at the
media and the public rather than at policy élites.”98
Chancellor Schröder approved the Hartz Reform proposals

before the election. The election provided a mandate to
implement the reforms. Once elected, the Government did not
delay. A top-level steering group including Chancellor Schröder,
Peter Hartz and Wolfgang Clement was formed to force the
reforms through.99
Post-election, the Ministry of Labour and Social Affairs was

merged with the Ministry of Economics and Technology under a
single minister, Wolfgang Clement.100 This neutered the
opposition from the Labour Ministry, which was seen as more
keen on the existing social policy. No representatives of the
Labour Ministry were on the Hartz Commission. The preparation
of the legislation to change the Social Assistance and
Unemployment Assistance was undertaken by a working group
of the Commission on the Reform of Municipal Finances.101 This
included representatives of the Lander, counties and
municipalities, etc. In response to the scandal affecting the FLO,
the OECD recounted how: “The Government turned the
volunteer administrative board of the BA, dominated by the
social partners, into a supervisory board with no executive
98
99
Ibid.
100
Ibid.
101
Ibid.
37
functions and installed a new BA management board, made up
of professionals and operating under the same rules on the
separation of executive authority and oversight that applied to
listed companies.”102
This neutered their potential opposition to reform.
Concessions to ensure rapid passage of the bills

The reforms were also carefully sequenced to ensure those that
were politically and technically easiest to implement were
adopted first. The reforms did not tackle the issues of collective
bargaining or unemployment protection; nor did they constitute
a large-scale attack on restrictive practices that frustrated
market entry in various highly regulated sectors, such as the
handicrafts industry.
The reforms concentrated on a sector without trade union

representation – the unemployed. The Final Report of the Hartz
Commission omitted its proposal to limit the duration of income-
related Unemployment Benefits I. It had provoked strong trade-
union opposition when announced as an interim conclusion;
although, as seen above, the post-Schröder Grand Coalition of
the CDU and SPD subsequently oversaw the introduction of a
reduction in the duration of Unemployment Benefits I effective
as of 2006.103
Divided control of the federal parliament helped supporters of

the reforms by reducing the scope for concessions to the SPD
left and the trade unions. Divisions in the administrative control
of the benefits system was more of a hindrance. The FLO
102
Ibid.
103
38
administered unemployment benefit, while the municipalities
administered social assistance. Combining these two was
difficult. The SPD wanted Unemployment Benefit II to be
controlled by the Federal Employment Office. The Conservative
majority Bundesrat (Upper House of the Federal Parliament)
wanted a municipal-run system.104 A compromise was reached
where 69 municipalities were exempted from the agreed system
and allowed to opt out.105 A Municipal Option Act was introduced
which codified the division of responsibilities between the
Federal Employment Office and the local welfare offices.106
Did the reforms reduce unemployment?

The Hartz Reforms aimed to reduce unemployment by half by
2005 and to reduce the average length of unemployment by a
third.107
Unemployment continued to increase between 2003 and 2005

while the reforms were introduced.108 It peaked in 2005 at 11.3%
before declining in each subsequent year to 10.3% in 2006, 8.7%
in 2007 and 7.5% in 2008.109 In 2009 unemployment increased by
0.3% from 7.5% per cent to 7.8%. It then resumed its downward
course, declining to 7.1% in 2010, then 5.9% in 2011, to 5.5% in
2012.110 An IMF Research Paper estimated that: “the reform leads
104
105
Ibid.
106
Ibid.
107
The Economist, op. cit., August 22, 2002.
108
109
Ibid.
110
Ibid.
39
to a substantial reduction in the unemployment rate – from 9%
before the reform to 7.78% after the reform.”111 The German
Socio-Economic Panel found that: “Since the implementation of
the Hartz reforms in the mid-2000s, the importance of the
outflow rate has been steadily increasing. The rising importance
of the outflow rate, in conjunction with the falling cyclical
volatility of the inflow rate, indicates a substantial increase in
matching eﬃciency.”112
To simplify – fewer people were entering unemployment and

more of the unemployed were finding work. An IMF Research
Paper found that unemployment decreased until 2008 and then
“barely moved during the Great Recession.”113
By 2011, the unemployment rate dropped below 3 million, the

lowest it had been since 1992.114 The following graph clearly
shows the decisive break in the long-run uptrend in
unemployment that occurred in 2005.
111
Tom Krebs and Martin Scheffel, op. cit.
112
Matthias S. Hertweck and Oliver Sigrist, op. cit.
113
114
Directorate General of the Treasury (France), op. cit.
40
Chart 1: The Unemployment Rate in Germany 1970-2011
Source: OECD
Did the reforms increase the size of the active labour force?
A study for the French Ministry of the Economy and Finance in
March 2013 found that:
• the German economy created 2.5 million jobs in the period

following the Hartz reforms;
• the economically-active population in Germany increased by

4.9% between 2004 and 2011;
• the employment rate increased from 64.9% to 72.4% between

2004 and 2012;
• the labour force participation rate among older workers

increased by 16.2%;
• the numbers in part-time work increased by a third.115
115
Directorate General of the Treasury (France), op. cit.
41
The Reforms and the Social Democratic Party
The labour market reforms split the SDP. In 2005, under the
leadership of Oskar Lafontaine, a former SDP Minister of
Finance, the left of the party formed a new party entitled Labour
and Social Justice – The Electoral Alternative (WASG).
WASG contested the 2005 regional elections in North Rhine-

Westphalia. The SDP had ruled this state alone or in coalition
since 1966. The WASG gained less than 3% of the vote and then
merged with the Left Party in June 2007. However, the Christian
Democrat Union won in North Rhine-Westphalia with a 7.9%
swing to the party and a 5.7% swing away from the SDP. This
gave the CDU/CSU and the FDP an enhanced ability to block
SPD reforms when these measures reached the Bundesrat.
In response, the SPD party leader Franz Muntefering and

German Chancellor Gerhard Schröder orchestrated the loss of
a motion of confidence by urging SPD members to abstain. This
was the only way they could procedurally ask the German
President to call an early Federal Election. This was called for
September 2005. There was a 4.3% swing away from the SDP
and a 4.7% swing to the Left Party who increased their number
of seats from 2 to 52.
All of the three major parties, the SPD, the CDU and the Green
Party, lost votes and seats in the election. The Greens lost their
position as the third largest party (held since 1994) dropping to
fifth place. The CDU/CSU gained 35% of the vote. The SPD
achieved 34% but the personal hostility between Gerhard
Schröder and Oskar Lafontaine made an SDP/Left Party/Green
party coalition difficult to achieve. Angela Merkel then formed a
Coalition Government including the SPD, in which she became
Chancellor.
42
3. TROUBLE AHEAD:
THREATS TO THE REFORMS
How did German labour costs grow post-Hartz Reforms?
The following graphs demonstrate the impact of the Hartz
Reforms on German economic competitiveness.
Chart 2 shows that German wage growth was below growth in

GDP throughout the period. This conforms to the German
Council of Economic Advisors’ advice in 2002 to grow wages
below the level of GDP growth to bring the unemployed into
employment.116
116
43
Chart 2: Germany: Real Wage and Real GDP per capita
Source: Statistisches Bundesamt: annual real wage index (series: Reallohnindex) and
annual real GDP per capita (series: Bruttoinlandsprodukt) normalised to 1992.
Chart 3 shows German labour cost increases relative to the

Eurozone average and reveals that German wages have been
growing below the average since late 2005 (the time Hartz IV
was introduced).
Chart 3: German Labour Costs compared to the Eurozone
Source: Compiled using Trading Economics tool
Chart 4 shows the impact of the Hartz Reforms on wage growth

compared with the alternative steady state model and it shows
a clear reduction in wages as a result of the reform. This
44
answers the question “what would have happened to wages
without the Hartz Reforms” – they would not necessarily have
increased, but the drop seems to be induced by the Hartz
Reforms.
Chart 4: Wage dynamics in Germany
Source: International Monetary Fund, 13th Jacques Polak Annual Research Conference
Chart 5 shows that the reduction in real wages in Germany was

not achieved through high inflation: the German inflation rate
was consistently below the euro average rate and barely
exceeded 2% throughout the period. One commentator has
claimed that this wage restraint caused low inflation, which
meant that: “Germany’s so-called real effective exchange rate
within the eurozone fell by 17 per cent between the beginning of
1999 and the third quarter of 2011, making its exports much
more price competitive. Over the same period, France’s real
45
effective exchange rate rose by 4.4 per cent. Germany’s internal
devaluation contributed to a big divergence in the two
countries’ relative trade positions. Whereas ten years ago
France and Germany both had small current account
surpluses, France is now running a deficit of around 3 per cent
of GDP, while Germany is running a surplus of 6 per cent [as of
2011].”117
Chart 5: Inflation rate in Germany compared with the Eurozone
Source: Compiled using Trading Economics tool
The German labour market and the Recession

Despite a decline of 4.7% in German GDP in 2009 and an output
decline of over 18% in manufacturing, the German labour market
remained strong:
• the German employment level remained at 40 million in both

2008 and 2009, and subsequently rose to 41.5 million;118
117
Simon Tilford, Why the self-flagellation?, Centre For European Reform,
France: , 10 February 2012.
118
Klaus F Zimmerman, op. cit.
46
• unemployment increased only marginally and was lower than
its pre-crisis value by 2010;
• in October 2013, Germany had the second lowest

unemployment rate in the EU at 5.2% (in comparison the UK
had a rate of 7.5% and the EU-28 had a rate of 10.9%;119
• the youth unemployment rate (those under 25 years) in

Germany was the lowest youth in the EU at 8.1% in 2012
compared to an EU-28 wide rate of 22.8%.120
Chart 6 shows how the composition of the German labour

market had changed dramatically: the number of inactive
citizens decreased, as did the proportion of permanent full-time
roles. These had been balanced by increases in the number of
self-employed, permanent part-time, marginal/irregular,
temporary and agency work.
The new flexibility of the employment market limited the effect

of the economic downturn of 2008. As the Institute for the Study
of Labor commented: “Without the extensive use of short-time
work, unemployment would have risen by approximately twice
as much as it actually did.”121
119
European Commission, eurostat, unemployment rates, seasonally
adjusted , October 2013.
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=Fil
e:Unemployment_rates,_seasonally_adjusted,_October_2013.png&fil
etimestamp=20131129085903
120
European Commission, Eurostat, Themes, Youth Unemployment
http://ec.europa.eu/europe2020/pdf/themes/21_youth_unemployment.p
df
121
Karl Brenk, Ulf Rinne, Klaus F. Zimmermann, Discussion Paper No. 5780,
Short-Time Work: The German Answer to the Great Recession, Institute
for the Study of Labor, June 2011. http://ftp.iza.org/dp5780.pdf
47
Chart 6: Evolution of the German Labour Force 1992-2007
Source: Institute for the Study of Labour (IZA)
This trend to a more flexible labour force is highlighted in Chart

7 where the proportion of short-term workers peaked in 2009
before dropping sharply.
Chart 7: Stock of short-term workers 1991-2010
Source: Federal Employment Agency
48
Will the reforms endure?
The SDP has recently been keen to distance itself from the
Hartz reforms, which despite their success, have not been
popular. As some leading academics have noted: “The Hartz
reforms have always been very unpopular among the German
public. This unpopularity has been documented in surveys, but
the best evidence comes from the upcoming National Election
in Germany to be held on 22 September 2013. There is no major
party that dares to run on a platform that openly endorses the
Hartz reforms. Indeed, several parties are trying to win votes by
promising to roll back the Hartz reforms, including the Social
Democrats who initiated the reforms in 2003-2005…”122
The unpopularity of the reforms has led to some reverses in

policy: for example, in 2008, the Grand Coalition partially
reversed the 2006 reform by increasing the maximum period of
unemployment benefits for both those currently unemployed
and the newly unemployed back up to 24 months.123
OECD research has also suggested that Germany’s continuing

economic success may endanger the reforms. It has argued
that the backlash against Hartz IV: “…was partly a product of
improved labour-market performance, which resulted in part
from the reforms: as the situation improved, the sense of
urgency about reform declined and politicians were more
willing to restore benefits and relax some of the more rigorous
elements of the reform.”124
122
Tom Kreb and Martin Scheffel, op. cit.
123
Ibid.
124
49
Evidence of this can be found in the recent Grand Coalition
negotiations. In the 2013 post-Federal Elections, the SPD have
secured a minimum wage of €8.50 euros per hour and a
reduction in the retirement age from 67 to 63 for those who
have worked for 45 years.125 This follows the introduction of a
statutory minimum wage in the postal sector in 2007.126
Who won and who lost from the reforms?

IMF analysis of the Hartz IV reforms found that:
• employed households gained as the output gains

outweighed the welfare loss due to the reduction in
unemployment insurance. This gain was equal to “an
increase of around 0.3 % of lifetime consumption.”;
• the long-term unemployed suffered a loss equivalent to 1% of

their lifetime consumption;
• the short-term unemployed also suffered a welfare loss but

“their welfare loss is significantly smaller than the welfare
loss of the long-term unemployed.”;
• the reforms lead “to an expansion in output and a decline in

real wages”, but the wage effect were “relatively mild.”;
• the rate at which the unemployed found jobs, which had

been stable before the Hartz Reforms, afterwards “began to
increase steadily until the year 2007, at which stage they
remained relatively stable at a significantly higher level.”.127
125
BBC News Online, Deal reached on new government for Germany
under Merkel, 27 November 2013,
http://www.bbc.co.uk/news/world-europe-25116115
126
127
50
Similarly, the OECD has found that:
• the incidence of long-term unemployment dropped from

56.4% in 2006 to 45.5% in 2009;
• around half of benefit recipients experienced a decline in

benefits, but one-third had their level of benefits increased.128
128
OECD Factbook 2013: Economic, Environmental and Social Statistics.
51
4. WHAT CAN BE LEARNT FROM THE
GERMAN EXPERIENCE?
Why can’t France be Germany?
Research by Societé Generale showed that, despite there being
only a 0.3% gap in employment rates between France and
Germany in 2003, this expanded to 10% by 2010.129
The unemployment rate rose in France during that period from

8.3% to 9.3%, while it fell in Germany from 9.2% to 6.7%.130 Alain
Minc, an advisor to President Sarkozy, explained that France’s
increase in the minimum wage and its introduction of the 35-
hour week, combined with the Hartz reforms in Germany,
sacrificed the 10% competitive advantage France had over
Germany in 1995. By 2007 they had lost 20%.131 Private
129
Gregory White, Why Nicholas Sarkozy Is More Than Happy To Turn The
Economic Reigns Over To Angela Merkel, Business Insider, 1 February
2011.
http://www.businessinsider.com/france-economic-reforms-2011-2
130
Gregory White, op. cit.
52
consumption in Germany had grown by only 4% between 2002
and 2011 but by 17% in France.132
This competitiveness gap led President Sarkozy to announce

his support for imitating the German labour market reforms
during his 2012 Presidential election campaign, saying “if it
worked for them, why wouldn’t it work for us?”133 Reuters also
reported him saying that “Germany has had huge success. That
doesn’t make us jealous, that inspires us.”134
Sarkozy pledged to cut €13 billion of social charges paid by

employers. This would be financed by an increase in the VAT
rate from 19.6% to 21.2%.135 He also argued for companies to be
able to negotiate at the firm level for increases in working hours,
provided the workers’ jobs were protected. He did not, however,
pledge to abolish the 35-hour week legislation installed by his
predecessors.
131
Spiegel Online International, Part One: Inside the Elysee: ‘Sarkozy Has
Learned To like Angela Merkel’ and Part Two: Inside the Elysee: The
Crisis Has Helped Sarkozy To Become An Adult, 24 January 2012.
http://www.spiegel.de/international/europe/inside-the-elysee-sarkozy-
has-learned-to-like-angela-merkel-a-810868.html
132
Simon Tilford, op. cit.
133
The Economist, “France’s Presidential Campaign”, 30 January 2012.
http://www.economist.com/blogs/newsbook/2012/01/frances-presidential-
campaign
134
Daniel Flynn, “German boom casts shadow over French election”,
Reuters, 15 February 2012.
http://uk.reuters.com/article/2012/02/15/uk-france-election-germany-
idUKTRE81E0I420120215
135
The Economist, op. cit., 30 January 2012.
53
Sarkozy’s opponents accused him of “capitulation to Germany”.
Francois Hollande’s Campaign Chief Pierre Moscovici believed
“not everything in Germany’s economic model deserves to be
copied.”136 Opinion polls suggested 62% of French voters
thought their nation should take the German approach as an
example. But, of course, President Sarkozy nevertheless lost the
2012 election.
Was Germany just lucky?

Some have claimed that the German recovery of the 2000s was
due more to other economic factors, such as the sharp increase
in demand from emerging nations (such as China) for capital
goods. This underestimates the number of nations – in
particular, Japan, South Korea and Taiwan – competing to
supply capital goods.
Other reasons cited for Germany’s economic success were the

social market economy with its stress on co-operation and
consensus, collective bargaining, strong trade unions and the
Mittelstand of SMEs. However, this ignores the fact that all of
these features were part of the failing German economy of the
early 1990s, yet they are part of the successful economy today.
They cannot explain the change in fortunes.
Business figures sometimes credit a long-standing German

outperformance in exporting.
Are the recent problems with the German economy connected

to the Hartz reforms?
In the first quarter of 2014 the German economy grew by 0.7%.
In the second quarter of 2014 the German economy declined by
136
Daniel Flynn, op. cit.
54
0.2%. Why the reversal? The Ifo Institute has recorded monthly
declines in German business confidence since May 2014. The
pro-Russian rebellion in Eastern Ukraine had begun in April
2014, following the annexation of the Crimea. The impact of the
economic sanctions over Russian involvement in Ukraine is
difficult to quantify but this could be a factor.
Klaus Wohlrabe, an Ifo economist said firms with Russian links

were more pessimistic in their survey responses (to the Ifo
business confidence survey). Ifo President Hans-Werner Sinn
had predicted German economic growth would need to be
revised down in the second quarter, partly due to the Ukraine
crisis. Germany is a large exporter of agricultural products and
Russia’s largest European trading partner. Russia has imposed
a ban on the importation of some western products. The warm
winter in Germany may also have shifted some production to
early 2014 e.g. in construction. This may have made the contrast
between the two economic quarters appear starker than it was.
Nevertheless the unemployment level remains the second

lowest in the EU and the number of people employed in
Germany at 42 million in 2013 was the highest level since 1990.
Inflation is low, both wages and domestic consumption are
increasing. It is too early to tell what the causes of the recent
drop in German economic growth are but there is nothing to
suggest this is linked to the Hartz reforms.
The relevance to the UK

UK labour costs have recently increased in relative terms
compared to our German competitors. The Institute for Fiscal
Studies has estimated that during the Labour period in office
55
the rate rose “faster than average earnings overall.”137 The UK
opt-out from the Social Chapter with its employment and social
rights was ended and these rights were incorporated in The
Treaty of Amsterdam. Now in opposition, the Labour party,
correctly, aims to ensure that working people benefit more from
the UK’s economic growth. Higher welfare benefits are politically
toxic and public finances are constrained, thus the party is
devising means to increase the wages of the working poor to
help them out of poverty.
The Labour opposition have developed a concept called

‘Predistribution.’138 This is a simple concept – low wage work
should pay enough so these workers do not have to rely on
supplementary benefits. This is a worthy aim. It is also an
electorally-popular one. They want to achieve this through a
variety of mechanisms. First, is to pressure companies to adopt
the ‘living wage.’ This is a level of remuneration currently
determined by the Resolution Foundation to be: “the purchasing
power deemed necessary (albeit still in conjunction with full
take-up of tax credits and other means-tested benefits) to
provide workers and their families with a basic but acceptable
standard of living rather than to estimates of what the market
can bear without impacting on employment.”139
137
Mike Brewer and Robert Joyce, Welfare Reform and the Minimum
Wage, Institute for Fiscal Studies 2010 Election Briefing Note Number 8.
http://www.ifs.org.uk/bns/bn95.pdf
138
BBC News Online, Ed Miliband unveils ‘Predistribution’ plan to fix
economy, 6 September 2012.
http://www.bbc.co.uk/news/uk-politics-19503451
139
Matthew Pennycook, What Price A Living Wage? Understanding the
impact of a living wage on firm level wage bills, Resolution Foundation,
May 2012.
56
The second is to raise the minimum wage at an accelerated
rate (as yet unspecified). The Conservatives have also
embraced this movement, with David Cameron declaring in
2010 that the living wage was “an idea whose time has come.”140
Wage remuneration looks set to be a key issue in the next
election.
Wage stagnation and politics

Whether the growing recovery is leaving the working poor
behind is also a defining issue of the time. Worldwide, the
labour share of corporate profits has declined since the mid
1970’s. The National Bureau of Economic Research (NBER) in
‘Declining Labor Shares and the Global Rise of Corporate
Saving’ identified: “a five percentage point decline in the share
of global corporate gross value added paid to labor over the
last 30 years.”.141 They found: “of the 51 countries with more than
10 years of data between 1975 and 2007, 36 exhibited
downward trends in their corporate labor share.”.142
In ‘The Global Decline of the Labor Share’, the NBER explain

how “the lower price of investment goods explains roughly half
of the observed decline in the labor share.”143 Research from
America also highlights how most economic recoveries begin
with an increase in low wage jobs. Research by Dave Altig of the
140
Ibid.
141
Loukas Karabarbounis and Brent Neiman, Shares and the Global Rise
of Corporate Saving Declining, National Bureau of Economic Research
and the University of Chicago, October 2012.
http://faculty.chicagobooth.edu/brent.neiman/research/LabShare.pdf
142
Loukas Karabarbounis and Brent Neiman, op. cit.
143
Ibid.
57
Atlanta Federal Reserve Bank, shows that the lowest wage
sectors have provided 40 to 50% of the job gains in the
economic recoveries since 1970.144 The UK has the second
highest level of low paid workers among its total workforce, as
shown in the Chart below. The Hartz Reforms show that low paid
work is an essential part of the economy. What preceded the
Hartz Reforms shows what happens when social legislation
prices low paid work out of an economy, however well-
intentioned that legislation is, the result is higher levels of
unemployment.
Chart 8: Share of employees in low paid work
Source: Resolution Foundation
The Labour Party has also proposed a link between the level of
unemployment benefits a recipient receives and the tax
contributions they have made. Although it is not clear if the total
144
Federal Reserve Bank of Atlanta, Myth and Reality: The Low-Wage Job
Machine, 9 August 2013.
http://macroblog.typepad.com/macroblog/2013/08/myth-and-reality-the-
low-wage-job-machine.html
58
benefits bill would increase, or if the rises for some will be made
up by cuts in the benefits received by those without a
contributions record/less of a contributions record. The situation
in pre-Hartz Reforms Germany shows how this policy needs to
be carefully designed. Otherwise it can lead individuals to take
longer periods of unemployment to shorten their working life
using contribution-based welfare entitlement to supplement
their income until they reach pensionable age.
What are the lessons for the UK?

First, sanctions were introduced to reduce welfare payments to
increase the incentive to find work. Second, social protections
for low wage jobs were reduced. The responsibility for meeting
these social protections was largely transferred from the
employer to the state. Third, employment agencies were
redesigned; they became more focused on finding individuals
work and less on distributing welfare. Fourth, implementation
will not be smooth – Germany experienced a temporary
increase in unemployment as individuals were laid off under the
more generous previous social security terms and experienced
problems with the release of a new Government database. Fifth,
major reforms cannot be sprung on a people. The failure to win
the argument for Hartz VI reforms is one of the reasons it is now
being undone. Sixth, rebalancing the economy means
becoming price competitive in terms of exports. Germany did
this not by devaluing its currency, but by not increasing wages
in line with economic growth. This increased employment and
exports but reduced domestic demand. Following the German
model means the UK population would need to be willing to not
increase, and possibly reduce, their spending and accept zero
wage growth for an extended period. There is a trade-off
between benefit levels, employment protection and
employment levels and politicians need to be honest in setting
59
priorities and accepting the consequences of their policies. The
Trades Union Congress in their study German Lessons:
Developing industrial policy in the UK acknowledges that
“Germany’s trade surplus has been achieved at least in part on
the back of wage depression to subdue domestic demand,
which is not a model we advocate that the UK should follow.”145
145
German Lessons: developing industrial policy in the UK, Trades Union
Congress.
60
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elysee-sarkozy-has-learned-to-like-angela-merkel-a-
810868.html
29. The Economist, A plan to put Germans back into jobs,

August 22, 2002
30. The Economist, France’s Presidential Campaign: Sar-

kozy’s German Fixation, 30 January 2012
http://www.economist.com/blogs/newsbook/2012/01/franc
es-presidential-campaign
31. The Economist, German Labour Market Reform: Hartz

and Minds, 29 December 2004
32. VOX, German labour reforms unpopular success, Tom

Kreb and Martin Scheffel, 20 September 2013
http://www.voxeu.org/article/german-labour-reforms-
unpopular-success
33. WZB Social Science Research Centre Berlin, On the

Marriage of Flexibility and Security: Lessons from the
Hartz-reforms in Germany, Janine Leschke, Günther
Schmid, Dorit Griga, April 2006
http://skylla.wz-berlin.de/pdf/2006/i06-108.pdf
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The Hartz Reforms

…and their lessons for the UK

2. Germany Strikes Back: The Hartz Reforms 13

3. Trouble Ahead: Threats to the Reforms 43

4. What Can Be Learnt from the German Experience? 52

• One of the key problems with the stagnating economy was

• Additionally, the German welfare system was seen to be

• In 2002, German Chancellor Schröder convened a

- the creation of Personal-Service-Agentur to act as temp

- a grant for entrepreneurs, known as the "Ich-AG" (Me,

- benefit cuts of up to 30% if a person on unemployment

- merging social welfare benefits with long-term

• Though the reforms were largely unpopular, they are

• Currently, in the UK, both Conservative and Labour Parties

In the 1998 German Federal Election, Social Democrat Party

Three years later little had changed. The Chancellor’s own

The German economy had indeed been in the doldrums for

The headline rate of German unemployment was 8.7% in 2002.3

German reunification: intensifying, not causing, the problem

The level of structural unemployment in West Germany had

Welfare: a hammock more than a safety net

A newly unemployed person who had made contributions to the

Social insurance that shortened individuals’ working lives

High social security taxes sapped the desire to work

Marginal work was severely regulated

Hiring individuals for start-ups in new sectors or work in cyclical

Corruption in government discredited previous approach

What did the SPD do about unemployment in its first term?

A new supply-side approach

There was no shortage in demand for labour – there were one

The search for an alternative

• how to reduce the average unemployment period from 33

• how to reduce unemployment by half (from 4 million to 2

The Commission delivered its proposals six months later just

This strengthened the arguments of “modernisers” in the

Unusually in German politics, the composition of the Commission

The Commission made recommendations in 13 areas which are

Introduction of ‘Job Tightening the

Table 3: Hartz I and II Reforms

A voucher programme for vocational education was introduced

Subsistence payments began to vary according to an individual’s

Requirement for companies to register when they make a worker

Requirement to take up ‘reasonable’ offers of employment or

Reform of the law on Temporary Employment and Labour

A grant for entrepreneurs, known as the "Ich-AG" (Me, Inc.) was

A rise in the number of job centres (their name was changed

A more accountable Federal Labour Office

Unemployed clients received a voucher which they could use to

These reforms also sought to create a nationwide network of

Among people assigned to the PSAs, the under 25s were

The PSAs were not considered to be a great success: between

Minijobs – A ladder to permanent work

Midijobs – preventing a disincentive to work

It has been suggested by the Social Science Research Centre

Table 5: Demographics: the Midi- and Mini-job

Encouraging self-employment and small start ups

The Hartz III Reforms

Table 6: Hartz III Reforms - summary of proposals