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The Road Ahead for Labor Market Reforms

Why have German labor market reforms proven so controversial? Here's a look at the changes the Bundestag will vote on Friday and the difficult road ahead.


Time is running out for Germany's traditional labor laws, which are due for a major reform.

Left-wing parliamentarians within German Chancellor Gerhard Schröder's governing Social Democratic Party (SPD) have voiced concern over the nature of the labor market reforms. And one member of the government coalition partner, the Green Party, has said he won't support the legislation. So what's all the fuss about? All told, the legislation will fundamentally change the nature of the German welfare and unemployment system.

Even if he wins the battle in the Bundestag today, Schröder still has a tough fight ahead of him. And the proposed reforms may undergo yet another round of revisions -- should the members of the opposition-dominated Bundesrat have their way -- before they take effect.

The gist of it

Essentially, the legislation is comprised of two major parts, the Hartz III and the Hartz IV laws, both taking their name from the special extra governmental commission -- headed by the Volkswagen manager Peter Hartz -- that was set up to review the situation and propose changes.

Hartz III proposes a massive re-organization of the Federal Labor Office, remodeling it after private job placement agencies and renaming it the Federal Job Agency. The agency will be responsible for managing unemployment benefits and finding job placements for the unemployed. The agency will also have the power to dock the benefits of people who refuse the jobs offered to them, a controversial issue.

The Hartz IV law calls for merging the country's unemployment and welfare benefits into a new benefit called "Unemployment II." Germans will still be entitled to their old-school unemployment benefits, based on a percentage of their income -- sometimes up to 50 percent -- though the length of time they can claim this benefit will be reduced from 32 months to 12 months (18 months for the older unemployed) thanks to legislation approved in September. After 12 months, the long term unemployed will switch over to so-called "Unemployment II." This new benefit will be based on the rate paid out to social assistance recipients, which is not related to former income levels and is significantly less than "Unemployment I" benefit.

Critics have charged that these laws could result in wage dumping, with highly-qualified professionals forced to take low-paying jobs or risk punishment. And they worry that the laws do not offer enough protection to the long-term unemployed, particularly older unemployment recipients.

Not an easy road ahead

The next few months will not be easy. If the legislation is approved by a majority in the Bundestag, which last-minute negotiations with rebellious left-wing members of the SPD seem to have secured, Schröder and his party still face a tough road ahead.

The legislation package will then move on to the upper house, the Bundesrat, which represents the states. There the Christian Democratis Party and its Bavarian sister party have the majority. CDU leaders have already suggested that they will not support the current version of the reforms. "The law dubbed Hartz IV -- as it stands now -- will not get our support," said Roland Koch, Hesse's CDU premier. "It's not sufficient to solve our nation's problems, to create more work and more jobs and make sure that those who are capable of working do."

Premier Dieter Althaus of Thuringia, also a CDU member, said his party has plans of its own: "We will make our own suggestions -- in fact they have already been presented to the Bundesrat -- and I suggest that we look at both drafts and bring them closer together."

In response to these comments, Franz Müntefering, the head of the SPD parliamentary group, said, "We will not make any unconditional compromises."

Another round of negotiations will probably be necessary. Members of the Bundesrat don't have the power to overrule the legislation, but they can send it back to the Bundestag. Then, ever more delicate compromises will have to be hammered out in the two bodies' arbitration committee.

So, for the next few months at least, the saga will continue. But all parties involved will have to reach some kind of agreement by December 19 -- when the legislative period ends -- if they want to implement the changes by January 2004.

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