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German and European Unemployment during the Great Recession

Subject Area Statistics and Econometrics
Economic Policy, Applied Economics
Term from 2013 to 2016
Project identifier Deutsche Forschungsgemeinschaft (DFG) - Project number 242224335
 
Final Report Year 2017

Final Report Abstract

The project looks at the impact of the selected set of policy instruments on the dynamics of unemployment in Germany during the Great Recession. It further elaborates on the meaning of successful German policies for the other EU economies. The policy tools in question comprise the elements of the Hartz reforms and the increasing use of flexible working time arrangements. Among the former we consider the unemployment benefit reform (Hartz IV) and the restructuring of the Federal Employment Agency (Hartz III). Among the latter, most of the attention has been given to working time accounts, followed to a lesser extent by minijobs. On the side of the labour market reforms, key finding of the project is that the restructuring of the Federal Employment Agency (Hartz III) has had a strong and permanent positive effect on the effectiveness of the mediation process between vacant jobs and unemployed workers. The reform of the Agency has not only reduced unemployment by about 0.8 percentage points in mid 2000s but also helped keeping the reduced degree of coordination friction robustly constant throughout the entire span of the Great Recession. At the same time the benefit reform (Hartz IV) was not found to have had any effect on the dynamics of German unemployment. On the side of flexible working time schemes the findings of the project are less unequivocal. Regarding working time accounts, the main message is that working time accounts may not be perceived by policy makers with too much optimism. While they indeed turn out to be a useful tool for enhancing flexibility of labour demand, their effect on turnover and consequently unemployment is ambiguous. It depends strongly on the productivity of a firm, wage costs and the nature of the shock that hits the goods market. In particular, this project demonstrates that working time accounts are likely to increase job destruction at lowproductive firms in short-lived recessions and at all firms in protracted recessions. Still, looking at the specific situation in the German manufacturing immediately before the Great Recession and taking into account the fact that the recession lasted not too long and hit predominantly high-productive and export-oriented firms, the theoretical model developed in the course of this project predicts that working time accounts have indeed positively contributed to reducing turnover and hence restraining the rise of unemployment in Germany in 2008-2009. Regarding minijobs their impact has turned out to be more than modest. The project could not establish any significant connection between minijobs and flows to unemployment, implying that the former were not acting as a cushion between the regular jobs and unemployment during the recession. Summing up, labour market flexibility through reduced coordination frictions together with wider availability of working time accounts emerge from this project as major contributors to the German success in curbing unemployment during the Great Recession. At the same time, the project emphasizes that positive contribution of working time accounts has been realized in the confluence of quite favourable circumstances that need not necessarily be repeated in the recessions to follow. This finding also serves as a main take for the other European economies that wish to learn a lesson from the German experience. Hartz und die Folgen, Frankfurter Rundschau, May 4-5, 2016, p.3 (by Stefan Sauer)

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