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February 04, 2005

Unemployment in Germany

In the middle of the Economist's article there is an interesting statement I had forgotten from a Berkeley economist:

Economist.com: More than 5m Germans were unemployed last month, the agency revealed.... 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....

The longer they remain out of work, the less the unemployed make their presence felt in the labour market. Writing about the Great Depression, Brad DeLong, an economic historian at the University of California, noted that the long-term unemployed become “discouraged and distraught”. After a year without work, “a job must arrive at his or her door, grab him or her by the scruff of the neck, and throw him or her back into the nine-to-five routine if he or she is to be employed again.”...

Opponents of these reforms argue that there is simply not enough work to go round.... [But t]he demand for labour is not a fixed lump. Employers will keep hiring until it ceases to be profitable to do so. The ultimate limits on an economy are on the supply-side: eventually, the labour market will tighten and inflationary pressures will emerge.... Unfortunately, the German economy is still far from testing those limits. Inflation is low, leaving plenty of room for the economy to expand. But the animal spirits of households and firms are falling short. Indeed, some economists worry that efforts to resolve Germany’s supply-side problems may be worsening the economy’s demand-side difficulties....

Posted by DeLong at February 4, 2005 12:05 PM