The German labor market after the Great Recession: successful reforms and future challenges

Abstract

The reaction of the German labor market to the Great Recession 2008/09 was relatively mild -especially compared to other countries. The reason lies not only in the specific type of the recession -which was favorable for the German economy structure -but also in a series of labor market reforms initiated between 2002 and 2005 altering, inter alia, labor supply incentives. However, irrespective of the mild response to the Great Recession, there are a number of substantial future challenges the German labor market will soon have to face. Female labor supply still lies well below that of other countries and a massive demographic change over the next 50 years will have substantial effects on labor supply as well as the pension system. In addition, due to a skill-biased technological change over the next decades, firms will face problems of finding employees with adequate skills. The aim of this paper is threefold. First, we outline why the German labor market reacted in such a mild fashion, describe current economic trends of the labor market in light of general trends in the European Union, and reveal some of the main associated challenges. Thereafter, the paper analyzes recent reforms of the main institutional settings of the labor market which influence labor supply. Finally, based on the status quo of these institutional settings, the paper gives a brief overview of strategies to combat adequately the challenges in terms of labor supply and to ensure economic growth in the future.

Is Germany the North Star of Labor Market Policy?

“…With respect to PLMP, the unlimited payment duration of unemployment benefits and unemployment assistance was an extraordinary feature of the German system (Caliendo and Hogenacker, 2012). The replacement rates for the long-term unemployed were higher than in any other OECD country, while replacement rates for the short-time unemployed were comparable to many other countries (Eichhorst et al, 2008).…”

“…A number of studies are directed at this important question (Möller, 2010;Burda and Hunt, 2011;Rinne and Zimmermann, 2012;Eichhorst, 2012;Bonin, 2012;Caliendo and Hogenacker, 2012). Representative of this literature, Rinne and Zimmermann (2012) argue that a combination of factors created an environment that is a challenge to replicate.…”

Start-up subsidies for the unemployed: Opportunities and limitations

“…They have been a major part of Germany's active labor market policy for a decade [10]. During 2002-2011, some 120,000-250,000 participants received start-up subsidies per year-a substantial share of the 300,000-450,000 annual start-ups.…”

Not so standard anymore? Employment duality in Germany

“…However, over the last few years, in particular in the aftermath of the Great Recession in 2008-09, this picture has changed dramatically (Rinne and Zimmermann 2011;Eichhorst 2014;Caliendo and Hogenacker 2012;Dustmann et al 2014). This does not hold only for the perception of outside observers but also for real changes in Germany's labour market performance, which is now fundamentally different from the situation in the late 1990s and early 2000s.…”