A Short History of Labour Market Reforms in Germany, France, Spain and Italy

Before analyzing the distribution of labour market risks, I will briefly review the most important labour market reforms in Germany, France, Spain and Italy in the last two decades, starting with Germany as a case of profound flexibilization.


Throughout the 1990s and early 2000s, Germany was dubbed the ‘sick man in Europe’ (Economist 2004) for its sluggish growth rates, persistently high unemployment and low employment rates. With the pathbreaking Agenda 2010—and the aid of a decade of wage moderation and advantageous currency rates—it managed a spectacular turnaround and is now the celebrated poster child of labour market liberalization.

Many and different reasons have been proposed to explain why the red-green government under Chancellor Schroder undertook such an extensive reform of the German welfare state, which was thought to be reform-resistant and stalemated (see Kitschelt 2003).[1] Regardless of political motivations, Agenda 2010 undoubtedly signifies a turning away from the traditional Bismarckian ‘social insurance’ welfare state model (Kemmerling and Bruttel 2006; Seeleib-Kaiser and Fleckenstein 2007). Since reforms in the labour market are usually considered to be at the heart of the reform package, the following discussion focuses on the changes in labour market policies, implemented in a package of four Hartz laws.

The first two Hartz laws, enacted in 2003, increased the activation orientation and tightened benefits requirements. Once a spell of unemployment lasts longer than 18 months, the unemployed are forced to take any available job, regardless of their original qualifications and pay. The introduction of so-called mini-jobs that reduced social contributions on low-paid jobs and secondary employment also reduced labour costs. Other activation measures included the so-called Ich-AGs (‘me inc.’), that is, the facilitation of small (and smallest) enterprises. The third Hartz law entailed an internal reform of the public placement agency with the aim of improving management and placement of jobseekers.

Last and most controversial of the four laws, Hartz IV reformed the structure of unemployment insurance. In the past, Germany had three kinds of assistance for the unemployed: unemployment benefits, unemployment assistance and social assistance. The unemployment benefits system built on the insurance principle and was insider-oriented: benefits were earnings-related and the amount received depended on contribution records as well as the age and family status of the job seeker, thus highly benefiting (male) insiders. After up to 32 months,[2] the unemployed moved to unemployment assistance where benefits were lower but still earnings-related (54 per cent of previous earnings) and unlimited in eligibility time. Only those who did not qualify for unemployment insur- ance/assistance (lone parents, those with incomplete contribution records or the marginally employed) relied on social assistance—a means-tested and stigmatizing benefit. What is more, unemployment benefits were often used as a pre-early retirement scheme (Manow and Seils 2000). Unemployed above the age of 58 were not expected to return to the labour market but received the first three years of unemployment benefits (often topped up by their employers to receive benefits corresponding to original levels of their wages) before qualifying for early retirement.

Hartz IV stands for a radical change in this system. It reduced the generous earnings-related unemployment benefits (Arbeitslosengeld I) from 32 to 12 months and merged unemployment and social assistance in a single flat rate and means-tested benefit called Arbeitslosengeld II (colloquially called HartzIV). The ArbeitslosengeldIIcorresponds roughly to the level of the former social assistance benefits. More than two thirds of the unemployed today have to rely on the means-tested benefits (Hassel and Schiller 2010; Seeleib-Kaiser and Fleckenstein 2007). Considering that the ‘old’ welfare system protected status and qualifications of skilled insider workers, these reforms represent a major break with the orientation of the German welfare system. At the same time, however, the regulation of regular contracts slightly increased with a sequence of reform steps between the mid-90s and the Agenda 2010 package of 2003, basically changing only the threshold of the size so that firms with fewer than ten employees are exempt from dismissal protection when it comes to new hiring (see Fig. 9.1).

One of the reasons Germany is celebrated for its labour market reforms is that it was largely impervious to the economic crisis of the late 2000s. This result is largely explained by the Agenda reforms, which increased the internal flexibility of the workforce (Eichhorst et al. 2010). To meet the crisis, additional measures to increase external flexibility were enacted in 2008. The use of short time work schemes was subsidized and the duration of the programmes enhanced (Eichhorst et al. 2010). Arbeitslosengeld I was increased for those above 50 to 24 months depending on the contribution period. In 2012, the government re-regulated temporary employment by introducing the principle of equal treatment of temporary and permanently employed.

In sum, the German labour market has become much more flexible in terms of the use of atypical employment, but insiders have lost large parts of their previous privileged position in the social insurance system and are more strongly exposed to the vagaries of flexible labour markets despite their highly institutionalized employment protection. Hence, on account of the profound flexibilization and the economic upswing, I expect labour market risks to be less unequally distributed in Germany.

  • [1] Kemmerling and Bruttel (2006) emphasize the window of opportunity provided by a scandal inthe Public Employment Service, Hassel and Schiller (2010) point to the looming collapse of WestGerman communes due to sky-rocketing expenditures for the long-term unemployed related to theGerman federal system and Rehm (2016) advances the argument that public support for generousunemployment benefits shrank due to increasing inequality in labour market risks. Others point topolicy-learning effects and the model role of the British labour market and welfare reforms (Seeleib-Kaiser and Fleckenstein 2007).
  • [2] This was one of the longest durations of unemployment benefits amongst all countries in the OECD.
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