The Economist has an interesting report on labor -- excuse me -- labour market woes in Germany.
SOME economic numbers are as resonant as they are significant. One such figure was announced on Wednesday February 2nd by Germany’s Federal Labour Agency. More than 5m Germans were unemployed last month, the agency revealed, the most since 1932, when the economic devastation of the Great Depression brought the Weimar Republic to an unhappy end.
The numbers are a little less resonant when adjusted for the season; the aftermath of Christmas never flatters the labour market. Taking this seasonal effect into account would reduce the jobless count to 4.71m, the statistics office said, an unemployment rate of 11.4%.
But the report goes on to note a big problem with unemployment rates -- given that they depend on who participates in job-seeking and who does not, they tend to get worse before they get better.
On January 1st, after parliamentary tussles and street protests, the government’s controversial reform of unemployment benefits came into effect. This reform, driven forward by Gerhard Schröder, the chancellor, is supposed to prod the jobless back into work. But its first effect was to prod many who had dropped out of the labour market back on to the unemployment rolls.
Under the “Hartz IV” reform, named after Peter Hartz, the man who proposed it, those who have been unemployed for over a year receive a flat-rate benefit, means-tested and paid only to those who seek work seriously. Previously, not everyone on long-term aid had to sign on at job agencies. Now they do. The labour office reckons that at least 222,000 people not counted as unemployed under the previous system are now registered as such.
This will be an interesting experiment, as it does not really address some other fundamental issues.
Labour markets rarely function perfectly. But Germany’s labour market is not really a market at all. It abjures free competition, which it likens to the law of the jungle. Firing is a last resort. Wages are negotiated collectively... The 5m outsiders, who lack a job, might be prepared to work for less than those who have a job. But employee protections and union rules insulate the insiders from any competitive threat the outsiders might offer. As a result, the insiders maintain wages above the level that would make it profitable for employers to hire those out of work.
Nice article on an issue that is worth keeping our eyes on.
UPDATE: Be sure to read Godement's comments below.
UPDATE 2: Brad Delong notes this story as well.
UPDATE 3: And this, from Tyler Cowen. (And while you're at it, take a look at aho's comment below.)