Earlier this week I chanced to listen to an interview on the Pat Kenny show. Pat interviewed the Minister for Social Protection, Joan Burton, about reforms and unemployment etc. We have a major problem with unemployment in this country and so any reform is worth looking at if it can assist in solving this issue.
A few things struck me.
First, there was very little discussion of the role of aggregate demand. The minister did note that lots of the unemployed were such consequent to the collapse of the housing bubble. But the ongoing flatlining of the domestic economy was scarcely mentioned.
Second, and flowing from this, much of the debate was on supply side elements. The minister referred time and again to the german (and austrian) experience. When it was noted that these countries were not suffering recession (low aggregate demand) the response was a confused agreement – yes but they have good labour market supply side policies. To my ears this came across as a thinly disguised eulogising of the Hartz reforms.
the Hartz reforms consisted of two elements : a radical shakeup of the state support services, in effect merging and streamlining job agencies, welfare offices, job centers etc and a significant push to force people to take jobs regardless. The first element is surely uncontentious- streamlining and making it easier for people to find any posts that might exist is a good thing. The second however needs debate. It amounted to a significant cut in the payments to the longterm unemployed and a gradual shortening of the period of unemployment benefit.
the premise of the Hartz reforms was that the basic economic environment was, for Germany, benign. There were, it was argued, jobs there for the longterm unemployed BUT the social welfare rates were such as to discourage people taking these.
So what was the effect? A recent IMF paper summarises the finding of research on the issue. While the reforms improved the lot of the employed, it made the situation of the unemployed worse off. It did reduce the longterm unemployment rate by a small amount. Other research supports this overall finding. Further research suggests that the package of Hartz reforms led to an increased substitution of (especially less skilled) full time work by parttime work. Finally, much of the gain appears to come from increased efficiency in matching – in other words the first part of the reforms, improving communication. Finally, Germany has no minimum wage – the resultant wage moderation and other unique features such as hour banking also matter hugely.
So, if we are going to go down the Hartz lines, lets have an open debate on this. By all means lets see a (labour) minister cut the longterm unemployment payment, in the hope that they will find jobs that are there to be found with the aid of an improved welfare office. But lets not think that this is going to be painless and lets also recall that these reforms worked for Germany in large part by making the domestic economy worker cheaper and more insecure while the economy as a whole powered ahead under an export engine. We need to be very cautious about replicating this in an environment where our exports are….fuzzy.