The Wall Street Journal

December 31, 2004

This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit:

• See a sample reprint in PDF format.
• Order a reprint of this article now.

Germany Under a Microscope

Its Labor-Market Experiment
Will Offer Lessons for Rest of Europe

December 31, 2004; Page A6

Germany's most significant economic overhaul since World War II begins to take effect tomorrow -- but instead of coinciding with a recovery as anticipated, it is coming just as soaring unemployment in the world's third-largest national economy threatens to magnify the plan's painful components.

The timing could complicate any further efforts at structural change aimed at curing the stagnation of Germany's economy, and of Europe's as a whole.

The results of Germany's so-called Hartz IV changes, which include significant cuts to the country's generous unemployment benefits, could make or break the motivation to trim social safety nets elsewhere in Europe. The changes starting Jan. 1 will drastically cut benefits of the long-term unemployed. Amounts paid to Germans still out of work after expiration of their standard unemployment payments -- generally 60%-70% of their previous net salary -- will drop to a level previously reserved for welfare recipients: a maximum €345, or about $470, a month plus money to cover rent on a small apartment and heating costs. Those benefits will be cut further if a person refuses a job offer.

Neighbors will take their cues from how events here shake out. "Our politicians for the moment are only watching what is going on in Germany, but don't want to make any reforms before having confirmation that they work," says Marc Touati, chief economist at Natexis Banques Populaires in Paris. "If they are a success, it will be easier for France to make them."

The Hartz IV rules come in tandem with another law, effective a year from now, that will cut the duration of full employment benefits to one year for people under 55 years old and to 18 months for those 55 and older, down from as many as almost three years. By comparison, France pays full benefits for two years; in the United Kingdom and the U.S., payments generally last about six months.

The immediate impact on people here will be striking, as an altered definition of who qualifies for payments is coupled with shrinking benefits for all. There probably will be psychological pain, too, as the unemployment rate, already above the European average, likely rises in the coming months to more than 12% from 10% now. That is partially due to how the out-of-work will be counted under Hartz IV, but real job losses also are expected.

General Motors Corp.'s European division recently announced plans to cut thousands of jobs in Germany. KarstadtQuelle AG, one of the nation's largest retailers, is planning to close a number of department stores. A recent survey by Manpower, a temporary-staffing company, showed that more employers now are planning job cuts than just a few months ago. Close to 34% of German companies are planning to lay off staff in 2005, according to a study by the German economic research institute Ifo for the business weekly Wirtschaftswoche.

Germany's skilled-trade association is expecting a loss of 100,000 jobs next year, after 200,000 disappeared this year. With these losses, the potential for a political backlash is growing and tensions are mounting. And four eastern municipalities are filing suit to put related issues before Germany's highest court. Meanwhile, some high-ranking politicians from the government's own party say they are considering ways to "improve" the laws in 2005.

Earlier in 2004, tens of thousands of people took to the streets to protest the changes. Further demonstrations are planned for Monday, the first working day after the new rules take effect.

Wolfgang Clement, the economics minister who shepherded the steps into law, admitted in a recent radio interview that he wasn't prepared for such hefty opposition. "This obviously wasn't a masterpiece of ours on the communication front," he said. To try to assuage fears, he now is promising that the German unemployment rate will be halved by 2010, an aim that many economists find unrealistic.

The legislation's intent was to jump start an economy that is a drag on the rest of Europe. Politicians, when pushing through the measure earlier this year as it appeared a recovery was gaining pace, hoped cutting unemployment payouts would force more than four million unemployed Germans to look harder for jobs and, if successful, inject much-needed productivity into the economy.

But the cuts may persuade Germans to save even more than they do now amid fears of future job losses, undercutting the government's hope that forcing people back to work also would raise domestic consumption. In any case, any benefits will take years to have an effect while the economic pain will be evident much sooner.

On both sides of the Atlantic, economists and policy makers say steps to create incentives for people to take jobs they otherwise wouldn't are vital to solve Europe's problem of waning competitiveness. Europe, already outpaced in productivity by the U.S., is awakening to the economic threat of a modernizing China. The Continent's working-age population is shrinking as its pool of retirees grows, posing a long-term problem of rising pension costs. More urgently, the strengthening euro -- which reached a high of $1.3668 Wednesday and is up more than 13% against the dollar since September -- is making European goods relatively more expensive in foreign markets and thus a harder sell.

If the overhaul gets off to a rocky start in Germany, other European politicians could shy away from following through with their own labor measures. France, for example, guarantees a 35-hour workweek for many employees and pays full unemployment benefits for two years. But amid a power struggle within French President Jacques Chirac's own party, those in office have been reluctant to press for contentious changes.

To be sure, France did take some steps in the 1990s by promoting short-term and temporary job contracts and by strengthening assistance for job seekers. But economists are skeptical that the government will do much to erode the 35-hour workweek or cut unemployment benefits anytime soon. Elsewhere in Europe, the Dutch government last month was forced to scale back plans to cut unemployment benefits after months of protests and widespread strikes.

The Hartz IV laws -- named after a Volkswagen AG executive who proposed them -- are the culmination of a string of efforts over the past few years designed to get people back to work. Last year, companies with 10 or fewer employees were allowed to fire employees more easily; that change made short-term hires an easier option for employers. The German government also has increased services it offers to help people find jobs.

But tomorrow's step is the farthest-reaching labor and social restructuring. It directly affects more than six million people. After World War II, German laws increasingly strengthened the safety net provided to workers. This is the starkest reversal of that course, although none of the measures have gotten to what many consider the heart of Germany's problem -- a bloated government payroll.

Under the new rules, an unmarried person in Berlin who formerly earned €1,500 a month before taxes in his former job and had rent and heating costs of €248 a month will see his monthly unemployment check fall 13% to €579 from €665.87.

Rainer Maas, a resident of Berlin with more than 30 years of experience as a computer scientist, lost his job two years ago. He is still looking, but with an unemployment rate of 16.7% in Germany's capital, "Who is going to read my application?" Mr. Maas gripes. The Association of German Industry reckons unemployment will rise to more than five million people in the coming months, bringing the jobless rate to 12%. Part of that rise will be purely statistical because those now receiving welfare will be forced to register as "unemployed" to receive benefits.

Nevertheless, economists predict that the mere headlines about rising unemployment will further entrench pessimism of German consumers and act as another drag on the economy. That will have implications for companies and possibly negative ramifications for the government of Chancellor Gerhard Schroeder, who is up for re-election in 2006.

Write to G. Thomas Sims at tom.sims@wsj.com1

URL for this article:,,SB110444195358313161,00.html

Hyperlinks in this Article:
Copyright 2004 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit