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Labor relations

German Agenda 2010 reforms 'mythical' status questioned

Germany, the story goes, is an economic powerhouse because it took pains to reform in 2003. Now, a scientific paper is challenging that view. When Germany reunited, it argues, its workers felt the squeeze.

Ask Germans why their economy has weathered the financial storm so well and they'll often mention Agenda 2010, the bundle of legislation passed more than a decade ago which, beyond cutting entitlements, also allows German companies to hire, fire and take on part-time workers more easily. Though these "Hartz reforms" were the pet project of former Chancellor Gerhard Schröder of the Social Democratic Party, German Chancellor Angela Merkel, a Christian Democrat, has praised them on multiple occasions.

Generally, the notion that Germany swallowed its labor medicine early when others failed to - and is now reaping the benefits of increased employment, booming exports and a robust German economy - is an appealing one. Some are saying that the Hartz reforms myth, however, has ballooned out of proportion.

"When you look at the data, the process of increased competitiveness started about eight years before the introduction of the Hartz reforms," says Christian Dustmann, a co-author of a scientific paper released Monday (03.02.2014) entitled, "From Sick Man of Europe to Economic Superstar: Germany's Resurgent Economy."

The professor of economics at University College London told DW that, while the reforms "may have created welcome flexibility for mini-jobs and part-time jobs, they were not essential in creating competitiveness."

Collective bargaining

What, then, is the source of Germany's economic strength? Dustmann points to the early 1990s, when East and West Germany unified and the Iron Curtain dropped.

"German industry threatened to outsource production to Eastern and Central European countries if unions and employee associations wouldn't give in to demands of more flexibility," he said.

Christian Dustmann (photo: Berufsfoto Christian Dustmann)

Dustmann considers the Hartz reforms to have played a minimal role

The result, he and three colleagues argue in their paper, is that the power relationship changed between workers and the companies employing them - to the benefit of the companies. "That led to the decentralization of wage bargaining," Dustmann said.

Whereas West German workers had previously relied on comfortable, industry-wide wages set by national unions, the new and abundant pool of cheap labor weakened their ability to bargain. Union membership fell, Dustmann says, and with it, the bargaining process "moved from the industry/regional level down to the level of the firm."

From then on, companies' works councils negotiated directly on behalf of their employees, allowing for more "flexible" and responsive salaries. As a result, wages dropped, and with them, the cost of manufacturing goods in Germany.

Agenda 2010's effects?

It's up to this point that Sabine Klinger agrees. The structural analyst at Germany's Federal Employment Agency told DW that German employees were ready to take concessions after reunification. "We saw this in the late 1990s and beginning of the 2000s," she said. Production plants, it was feared, could have been shifted to Eastern Europe. Workers responded.

However, where she differs from Dustmann and his colleagues, many of whom she knows in their role as consultants to the Federal Employment Office, is in the additional effect the Agenda 2010 reforms had on wage bargaining.

Former German Chancellor Gerhard Schröder stands before a sign that reads Agenda 2010 (photo: picture alliance)

Schröder and his party paid a high political cost for the reforms begun in 2003

"We have a quite clear-cut pattern that after the [Agenda 2010] reforms - the labor markets started to improve," she said.

Reductions in unemployment benefits reduced the allure of staying home without work, she said. Data shows an improvement in the Beveridge curve, which correlates job vacancies to labor force.

Crucially, however, "It happened in 2006, and not earlier," she said.

"Wage moderation was really accelerated after the reforms. So there's another clue that several forces were at work, and Hartz reforms really accelerated them, " she added.

Exportable lessons?

Whether Agenda 2010 was or wasn't crucial in explaining the increase in Germany's competitiveness, both Dustmann and Klinger agree that fundamental changes were afoot before the Hartz reforms were put in place.

And even though historical forces dictated those changes, Dustmann sees lessons to be drawn from them. "Create flexibilities which allow you to decentralize wage bargaining. That, we think, should be the message to southern European countries."

France, Italy and Spain each have rigid wage mechanisms, he says. Central to improving competitiveness there would be to set wages via direct negotiations between employees and employers - and not at the national level.

"Greece has had a tremendous increase in competitiveness over the last one or two years," he says. "The wage negotiations in Greece have come down very much to the level of the firm."

The economics professor added that he will watch with interest to see how the recovery takes place in Greece as compared to other European countries.

DW.DE