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Labor Market Reforms

Unemployment

Following Schröder’s reforms unemployment sank continuously in Germany. This positive trend continued even after financial crisis and economic recession led to sharp increases in EU-wide unemployment. Declines in Germany’s youth unemployment were particularly strong.

The reforms to the labor market and unemployment benefits originated in proposals submitted by an expert commission headed by Peter Hartz (which is why they are commonly referred to as the “Hartz reforms”). The reforms expanded temporary work along with low-wage and short-term employment, instituted a legal right to part-time employment, and promoted start-ups. In addition, they relaxed employee protection laws to make hiring easier for small businesses, restricted early retirement to keep more people in the labor force, and liberalized Germany’s Trade and Crafts Code to make it easier to form companies. Most of the public debate focused on the reforms to unemployment compensation. The reforms eliminated redundancies by combining welfare and unemployment assistance into a single system. The new laws also set a limit to the duration of full unemployment benefits. The unemployed now receive benefits in proportion to their previous income for a specific period (generally 12–15 months). Afterward they receive a minimum benefit (known informally as Hartz IV) for the remaining time of their unemployment. The dual principle of forcing the unemployed to accept greater responsibility while also providing greater assistance increased pressure on the unemployed to accept reasonable work while improving state-funded unemployment services such as training programs and job placement.

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