The labor reforms that set off a boom | Business| Economy and finance news from a German perspective | DW | 31.12.2014
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The labor reforms that set off a boom

After 10 years, the 'Hartz IV' unemployment reform still divides Germany. While it is credited with cutting unemployment and boosting the economy, some on the left feel it was too hard on the long-term unemployed.

Peter Hartz doesn't sound especially proud of the reforms for which he is known. "As chairman of the commission, I had to put my name to it," he said laconically in a recent interview.

The now 73-year-old headed the Hartz Commission, which drafted a significant restructuring of Germany's social system at the beginning of the millennium. The Hartz regulations, adopted by the Social Democratic-Green coalition government under Chancellor Gerhard Schröder, have changed the country. But they also continue to divide it.

"Despite all the painful cuts," Hartz reflected in the "Frankfurter Allgemeine Zeitung," "this policy was a success." It caused unemployment to fall significantly, he said. "We now have the lowest youth unemployment in Europe."

Peter Hartz (Photo: Sean Gallup/Getty Images)

The reforms were Schröder's initiative, but Peter Hartz's name has been attached to them

Indeed, Schröder's "Agenda 2010" program, with its labor-market reforms and the Hartz regulations, is recognized internationally as a key reason for the "German job miracle." But within Germany, anger at the reforms led at times to street protests. An army of lawyers challenged them. And this anger continues to be articulated by demonstrators such as those in the PEGIDA movement in Dresden.

The Left party, successor to the East German communist party, has declared the abolition of "Hartz IV" as one of its main political goals. Lobby groups are still making efforts to have them watered down. Even Schröder's own party, the SPD, tried to win back grassroots support under new leader Sigmar Gabriel - by promising to roll back some of the reforms.

Generous by most standards

The Hartz reforms were modified several times, but their core elimination of Germany's once-lavish social benefits was left intact, said Cologne-based social scientist Christof Butterwegge, one of their sharpest critics. He said he left the SPD because of the Hartz regulations, calling them "the transition from the social safety net to the soup-kitchen state."

Gerhard Schröder Archivbild 2003 (Photo: Bernd Thissen dpa/lnw)

Germany needed structural reforms - and Schröder delivered, at a cost

The best known is "Hartz IV," the mere mention of which is something of a red flag to its opponents. It grants long-term unemployed people of working age only a fixed state payment - currently 391 euros - while their children get less, depending on age. In addition, the state pays rent and heating costs. About six million men, women and children are currently dependent on it.

Critics say the regulations, which Chancellor Gerhard Schröder - a Social Democrat - initiated in 2003, mean many long-term unemployed end up on the bottom rungs of society. A skilled worker who before Schröder's reforms might have received state unemployment benefits based on his last salary would today be no better off than welfare recipients who had never worked at all.

Carrot and stick

Worse, Hartz IV recipients are seen by many as work-shy. The verb "hartzen," meaning "to be unwilling to perform any work," has made it into the German dictionary. Schröder bears part of the responsibility for this stigma. Saying there was "no right to laziness" in Germany, he popularized the notion that the long-term unemployed had had it too easy in Germany's cushy social system at the turn of the millennium.

Schröder offered a carrot-and-stick approach, with retraining, education and assistance for integration into the labor market, but also sanctions if necessary. Those who refused to work would be punished with the reduction of their unemployment assistance, which already represented only a subsistence minimum.

This was no idle threat. In 2013, over a million sanctions were imposed, with the average cut more than 100 euros. This meant "elements of criminal law found their way into the social system," as "Süddeutsche Zeitung" editorial writer Heribert Prantl put it.

Result: record employment

But the head of Germany's Federal Employment Agency, Frank-Jürgen Weise, sees the Hartz reforms' successes. In 2005, 5.3 million were unemployed. Now that number is under three million. "This is no mean feat," he said. And Germany's employment rate reached a record high in 2014.

Mindestlohn Ausnahme Jugendliche Ferienjob Regalauffüller

The low-wage sector has grown due to Hartz IV

Butterwege is still critical: "Even if Hartz IV had been partly responsible for reducing unemployment, the price our country had to pay - and especially its socially disadvantaged - was much too high," he wrote in the far-left daily "Neues Deutschland."

German labor unions also say a side effect of Hartz IV has been a booming low-wage sector. Under Hartz IV, the unemployed became more willing to accept lower pay and less favorable working conditions, the German Confederation of Trade Unions (DGB) says. Wage levels in Germany as a whole declined.

As a result, they say, many unemployed workers today take jobs that do not pay enough to live on. The government therefore provides benefits to bring this up to subsistence level, so they earn at least as much as someone living off Hartz IV. This amounts to a huge government subsidy program for the low-wage sector. A minimum wage, which will take effect in January 2015, is meant to eliminate this absurd side effect.

The nail in the coffin for Schröder

But the labor market was not the only thing turned upside down by Schröder's reforms. The political landscape changed, too. As the author of Hartz IV, the SPD's reputation as the party of the common people took a beating, and it lost members and elections. Angry former party chairman Oskar Lafontaine joined together with Gregor Gysi, leader of the post-communist PDS, to form the Left Party, saying the Social Democrats had given up their leading role in the struggle for social justice.

In eastern Germany, where the percentage of long-term unemployment was particularly high, they were particularly successful. The controversy within the SPD over Hartz IV was a nail in the coffin for Schröder's chancellorship in 2005. No longer able to rely on the votes of the left wing of his party, he took the bull by the horns, called new elections - and lost.

Whenever Schröder's successor as chancellor, Christian Democrat Angela Merkel, praises his services to the nation in carrying out labor market reforms, she's probably sincere. But it pours salt on a Social Democratic wound.

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