Sweeping modernisation of labour market policy proposed

August 2002 saw the publication of the report of the Hartz Commission, appointed by the German government to make proposals for a comprehensive solution to Germany's persistent unemployment problem. The commission has proposed a programme that, if implemented, will bring about the most sweeping reform of Germany's labour market policy for decades. The stated objective of the commission is to halve the current unemployment figure of 4 million within three years. The government is planning to implement the proposed strategy, which has received a mixed response from the social partners.

Based on the International Labour Organisation (ILO) standardised definition of unemployment, the German unemployment rate has oscillated between 8% and 10% over the past five years. Although there are currently 4 million jobless, 1 million vacancies remain unfilled, and two-thirds of employers complain they cannot recruit the staff that they need. Around a third of unemployed people have been without a job for over a year - the average length of unemployment is 33 weeks. The institution that is supposed to combat unemployment, the Federal Employment Service (Bundesanstalt für Arbeit, BA), with 90,000 employees, enjoys a near-monopoly over job placement, but is often said to be a 'paralysed colossus'. Germany currently pays out some EUR 48 billion a year in unemployment benefit s. Depending on the recipient's family status, an unemployed worker receives 60%-67% of the former wage for up to 32 months, based on a non means-tested benefit, and 53%-57% for an unlimited period thereafter as means-tested unemployment assistance.

Hartz Commission

In February 2002, it was discovered that the BA was inflating its success in placing unemployed workers in jobs (DE0203204F). In response to the detection of this mismanagement, the so-called Hartz Commission- named after its chair Peter Hartz, head of the personnel executive committee at the motor manufacturer, Volkswagen- was established by the Chancellor, Gerhard Schröder, to recommend reforms aimed at a modernisation of Germany’s labour market policy and a comprehensive solution to the country's persistent unemployment. The commission was composed of 15 experts - two academics and 13 members drawn from trade unions, management consultancies, company managing boards and political and economic circles. The two most important employers' and business associations - the German Confederation of Employers' Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) and the German Industry Association (Bundesverband der Deutschen Industrie, BDI) - did not join the commission.

The Hartz Commission issued its final report on 16 August 2002. According to Mr Hartz, the objective of its proposals is to halve German unemployment, within three years.

On 21 August, the government approved 15 objectives for the implementation of the commission's strategy on labour market reform. In so doing, the government expressed its strong support for the commission's recommendations on achieving a sustainable reduction of unemployment and the restructuring of the BA into a modern service agency. Speaking after the relevant cabinet meeting, Chancellor Gerhard Schröder said: 'What we want is for the unemployed to be viewed not as anonymous cases but rather as persons and partners. We offer assistance to those who are looking for employment and expect this assistance to be responded to with personal efforts.' The Minister of Labour, Walter Riester, explained that the approved objectives combine the measures contained in the Hartz commission's strategy with the government's policy conception, as well as existing instruments such as the recent 'Job-AQTIV' Act (DE0111203F). Preparations are now underway for legislative measures and a committee of state secretaries is to report regularly to the cabinet on the status of implementation.

Proposals in detail

One main proposal of the Hartz Commission is to turn the BA's 181 regional offices into de facto temporary employment agencies, known as 'personnel service agencies' (PersonalServiceAgentur, PSA). Anyone still jobless after six months would in effect be employed by these agencies, and hired out on a short-term basis (though on trade union-negotiated rates), or have their benefits docked. The Hartz Commission estimates that some 780,000 jobs could be created in this way. The philosophy of the PSAs would be based on the same 'stick-and-carrot approach' as applies to most of the commission's ideas for tighter rules on benefits and swifter work placement.

To speed up job placements, and thereby limit spending on benefits, the commission recommends that workers be required to inform their local employment office the moment they receive notice of termination of employment, and not to wait until they lose their jobs. Every jobless person should be prepared to accept a lower wage than before, or face a cut in benefits, and young and single unemployed people would be expected to move anywhere in the country for work, or risk a similar cut.

To free the staff of the BA for the more useful task of matching job-applicants to vacancies, rather than calculating rates for unemployment benefits and assistance, the commission initially proposed a more simple system: flat-rate benefits should be paid at only three levels for six months and thereafter gradually scaled down until they reach the basic social welfare level. This suggestion, however, was withdrawn, mostly due to the intervention of the unions.

Another proposal is aimed at reducing incentives to work on the basis of undeclared wages, which cost the state both lost revenues and the payment of benefits to the supposedly jobless people involved. Hence, the commission proposes that 'odd-job' and similar workers be licensed to set up as one-person self-account workers, being allowed to earn EUR 25,000 a year taxed at just 10% with simultaneous compulsory social insurance.

The government's 15 objectives to implement the commission's strategy target three different levels of action:

  1. creation of new jobs, though the
    • introduction of PSAs in each employment office district,
    • promotion of employment at home,
    • introduction of self-employment or family employment as a new form of labour,
    • use and development of regional potential in eastern Germany,
    • introduction of a 'Job Floater' scheme as an innovative instrument to invest in jobs, and
    • introduction of company employment reports and premia for increasing employment;
  2. bringing together unemployed people and available jobs, through the
    • introduction of job centres throughout the country,
    • simplification of labour law, use of advisory teams, and introduction of notification requirement for dismissals and resignations,
    • expansion of availability of child daycare facilities,
    • reversal of the burden of proof for cases relating to unemployed people's benefits, and creation of flexible sanctions,
    • promotion of training and employment for young people (DE0209203F), and
    • development of a 'bridge' system of employment for older persons; and
  3. creation of service-oriented and efficient structures in the BA, through the
    • simplification of instruments for the promotion of employment, and strengthening of competition,
    • merger of unemployment benefits and welfare benefits, and
    • more effective organisation of workflows and control activities at the BA.

The government is convinced that the implementation of these measures will create further important prerequisites for the systematic use of existing employment opportunities, as well as reducing and preventing unemployment, particularly long-term unemployment.

Legislative measures will be introduced at the beginning of the next legislative term. They will include extensive changes to the legislation on the promotion of employment (set out in the third book of the Social Security Code), in further areas of the Social Security Code, and in tax law. In the case of measures below the level of legislation - eg regulations - some implementing measures could be initiated before the end of the current legislative term. These short-term objectives will include, for instance, the establishment of 50 PSAs in different cities by the end of 2002 and the promotion of negotiations between the BA and social assistance offices for the purpose of collaboration.


As soon as the most crucial features of the Hartz Commission's report became known, the new chair of the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB), Michael Sommer (DE0206201N), stated: 'We are on the right track.' At a press conference, Klaus Zwickel, president of the IG Metall metalworkers' union, voiced an almost identical response. Nevertheless, trade union representatives had criticised some initial suggestions of the commission as being too restrictive - such as the proposed cuts in the unemployment compensation system - and prevented them from appearing in the commission's final proposals. Furthermore, the exclusive focus on labour market policy was queried, because other important items, such as the creation of additional new jobs, were, it is claimed, lost sight of during the process of the commission’s discussions.

By contrast, business leaders claimed that some original proposals, such as the introduction of a flat-rate unemployment benefit system, had been diluted due to political pressure ahead of the general election on 22 September 2002. In a statement, the president of the Confederation of German Employers' Associations (Bundesvereinigung der Deutschen Arbeitsgeberverbände, BDA), Dieter Hundt, commented scathingly that 'the reform has to be coupled with lower taxes and social levies and a modern employment law.'


The Hartz Commission’s proposals have placed the issue of unemployment back at the centre of social and political discussions. This is at least an initial improvement on past developments. Nevertheless, commissions often serve as a pretext for governments to do nothing. In view of the persistence of Germany’s unemployment problem, this commission should prove an exception.

Obstacles to implementing the proposals will emerge as soon as it comes to the handling of detailed questions, such as how to make it more attractive for unemployed people to accept lower-status jobs. The introduction of the 'promotion and demand principle' therefore requires a deeper social and political discussion about what can be expected of unemployed people. Care must be taken that modernisation and social security remain balanced in the process. In this context, rebuilding the BA should not be mixed up with axeing labour market policy from social security.

Overall, the Hartz Commission's objective of cutting unemployment by 50% within a period of three years is a very ambitious aim. It should be kept in mind that these kinds of promises have often failed in the past. It is therefore difficult to accept this goal in view of the total of 4 million jobless and 1 million vacancies, not to mention the especially awkward situation in eastern Germany, where there are 1.4 million jobless compared with just 76,000 vacancies.

A thoroughly sweeping solution can be achieved only by means of an all-embracing economic, fiscal and labour market policy mix that combats unemployment. A more neutral discussion of the proposals after the general election will be welcome, as the unfavourable timing of the Hartz Commission' report just before a general election interfered with the political evaluation of the propositions and created considerable incentives for the political opposition to reject most of the suggestions. (Lutz C Kaiser, Institute for Economic and Social Research, WSI)

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