The death of Hartz IV

By: Wolfgang Münchau

In my FT column today, I argue that the SPD's U-Turn on welfare reform - a programme it once spearheaded under the name of Hartz IV - is the logical result of a badly designed reform programme. With this view, I am somewhat outside the mainstream in Germany, which is either pro-belt-tightening reform, or anti-reform whatsoever. My position is pro-reform, but I advocate a different type of reform programme than the purely labour-and-welfare focused reforms of successive German governments.

 

In this blog I would like to expand on the policy implications of the U-turn by Kurt Beck, the chairman of the SPD. He is proposing that "older" workers - 45 years and over! - should receive 18 months of unemployment pay, rather than 12. This is a recognition that the reforms did not work for older workers, and in fact this one of the key motivations for this welfare reform.

 

To understand this, we have to get into some detail of the system. Before the Hartz IV reforms, there were three types of support mechanisms. Unemployment insurance is a relatively generous system, to which every unemployed is entitled for a maximum period of twelve months, as long as they contributed to the unemployment insurance fund for a minimum period. Those who stay unemployed beyond this period are put on a special unemployment scheme run by the government. It is less generous than the insurance scheme, but more generous than welfare. On that scheme they could remain forever. The third scheme is welfare, which is administered by the local communities. It is the least generous, and it applies to people who never worked. If you are long-term unemployed, your welfare depended on how you became unemployed. If you worked before you would end with a relatively generous and permanent income.

 

Under the Hartz IV that middle layer had been scrapped, and welfare has been renamed unemployment pay, Type II. Unemployment insurance remains unchanged. It is now call unemployment pay, Type I. The difference is that after 12 months, the unemployed are basically now on welfare - which is really just enough to get by. The idea was an old-fashioned labour market supply side argument. You increased the incentives of the unemployed to take up work, but reducing their state guaranteed income.

 

The trouble is it did not work for the 1m or so older unemployment, because the labour market did not generate sufficient jobs for them - beyond a few anecdotal stories which were repeatedly written about in the press. Increasing their incentives to take up new work only had the effect to make them poorer.

 

The Schroder government's principal mistake was the failure to flank the welfare reform with other measures. To get older workers back into the labour market takes more than a change of incentives. It takes specialised training schemes, designed specifically for older workers. (You don't want to put a 55-year-old into a school). You need to provide financial incentives for companies to hire older workers, at least for a transitional period. The employment trend in German companies has been to hire ever more younger people. That trend would need to be reversed. You would perhaps also need to rethink hiring-and-firing laws for older workers. Many employers are reluctant to hire older workers for fear that they are stuck with them until the newly prolonged retirement age of 67. And furthermore, you have to think about, as Kurt Beck has done, about flexible retirement schemes. In addition, by far the best way to create 1m jobs on a sustainable basis is deregulate the service sector. The manufacturing sector is not going to create these jobs, at least not beyond the cyclical upturn. Throwing 1m people onto an un-deregulated labour and product is mad economically, and even more mad politically. The SPD paid an incredibly high price for a lousy piece of reform. This was just not worth it. Mr Beck has rightly concluded that he is not going to sacrifice his party's future. Nothing less was at stake as the party has lost the support of the poor segments of the electorate. Without them, the SPD is finished as a big political force.

The lesson of this debacle for any reformer is not to give up, but to pursue reforms with a strategic approach. Ask precisely what goals the reforms should fulfil, how and when progress is measured, what to do if the progress is not visible at the time when it should be visible, what other factors need to be implemented before your reform programme can succeed, and of course how to sequence the various elements of your reform programme.

In most continental European countries, governments are weaker than in the UK, where Ms Thatcher was able to push through a brutalist reform agenda against widespread opposition. Since reforms are a multi-annual process, it is any reformers' job to seek a broad consensus in society for the reforms - which means that you cannot just have reforms of the cost-cutting variety.

I always suspected that this did not in happen in Germany, because the SPD, including Mr Schroder himself, never really fully grasped what they were doing, and why they were doing it. I suspected they fully bought into this belt-tightening consensus, and that this is what these reforms would do. They never wasted much thought on the economic and political dynamic of what they had done.

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