Social Democratic Party chair sparks debate on recent labour market reform

Chair of the Social Democratic Party, Kurt Beck, recently put forward a reform proposal of key elements of the legislation on modern services in the labour market. The laws represent a core part of the ‘Agenda 2010’ reform programme initiated by the former socio-democratic chancellor Gerhard Schröder. Mr Beck’s proposal sparked debate within his own party and among the social partners as he seeks to undo certain past reforms.

At the beginning of October 2007, news of Kurt Beck’s move away from positions formerly held by the German Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) first reached the public. On 1 October 2007, the Financial Times Deutschland (FTD) newspaper stated that Mr Beck would seek to reverse a key piece of former chancellor Gerhard Schröder’s reform programme called Agenda 2010.

Agenda 2010 topics under consideration

In June 2003, SPD and Alliance 90/The Greens (Bündnis 90/Die Grünen) formed the ruling government coalition that adopted the reform programme Agenda 2010 (in German, 342Kb PDF). This programme was initiated by the then chancellor, Gerhard Schröder, as a multilayered concept (DE0303105F). The package, among other things, aimed to reform certain parts of the public welfare system. It also sought to stimulate labour market development.

While implementing the Agenda 2010 programme, laws I–IV on modern services in the labour market (Gesetze für moderne Dienstleistungen am Arbeitsmarkt I-IV) came into effect at various stages. Major changes were introduced in relation to the allocation of unemployment and public welfare benefits (DE0311101N).

Unemployment benefit I

The entitlement period for ‘unemployment benefit I’ (Arbeitslosengeld I) was reduced from 32 to 18 months for older employees and to 12 months for younger employees below the age of 55 years. Unemployment benefit I is mainly financed from social security contributions. Recipients of unemployment benefit I who are still unemployed when the entitlement period comes to an end are transferred, under certain preconditions, to unemployment benefit II (Arbeitslosengeld II).

Unemployment benefit II

Unemployment benefit II was created by merging unemployment assistance (Arbeitslosenhilfe) with social welfare assistance (Sozialhilfe). It was introduced by law IV on modern services in the labour market – that is, the HARTZ-IV reform (DE0608049I). This instrument is financed from public funds.

The introduction of unemployment benefit II severed the link between the amount of money paid out as financial assistance and the former income of the recipient. In short, unemployment benefit II is based on a flat-rate payment. Persons who apply for unemployment benefit II have to reveal their financial circumstances to public authorities who test the eligibility of applicants. Regulations governing the entitlement to benefits from public funds were made more stringent. Regulations on turning down a job offer were also tightened (DE0409204N).

In particular, the HARTZ-IV reforms supported, on the one hand, efforts to develop the professional and vocational skills of unemployed persons, as well as to assist them in their search for a new job. On the other hand, unemployed persons were required to be more proactive in their search for work. In other words, the legislative changes aimed to increase the incentives for unemployed persons to actively engage in their search for a new job.

Current political debate

In its article on 1 October 2007, FTD stated that Mr Beck recently proposed to extend the period in which unemployment benefit I would be paid for those unemployed persons over the age of 45 years. Furthermore he suggested softening the regulations concerning the allowable deduction of private assets and privately-owned property in terms of unemployed people who receive unemployment benefit II.

The FTD article underlined that Beck’s proposal seems to contradict the former political positions of his own party. Those positions are still held, for example, by the current federal Minister of Labour and Social Affairs, Franz Müntefering, who continues to highlight the need to adhere to the reform programme Agenda 2010.

Mr Beck’s proposal also affects key policies of SPD’s government coalition partner, the Christian Democratic Party (Christlich Demokratische Union, CDU). In November 2006, the Prime Minister of North Rhine-Westphalia, Jürgen Rüttgers of CDU, had argued in favour of linking the entitlement period of unemployment benefit I to the number of years of paid contributions to the unemployment insurance scheme. Under CDU’s recommendations (in German, 76Kb PDF), unemployed people who have contributed to the unemployment insurance scheme for 15 years should be entitled to three additional months of unemployment insurance payments. Those who have contributed for 25 years should receive an additional six months of payments, and those with 40 years of contributions should be entitled to an additional 12 months of payments.

While Mr Beck’s proposal links the length of time for receiving unemployment benefit I solely to the age of the recipient, Mr Rüttger’s concept relates it to the years of paid unemployment insurance contributions. Moreover, Mr Rüttgers repeatedly underlined that his concept would not incur any further costs. However, Mr Beck’s current proposal re-opened the lively debate on this issue within CDU which, last year, had led to the adoption of Mr Rüttger’s proposal as the general party line in November 2006.

Position of social partners

The political debate sparked by Mr Beck led to various positions being taken by the social partners.

On 1 October 2007, the Chair of the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB), Michael Sommer, warmly welcomed Mr Beck’s considerations to prolong the period of time for which older employees could receive unemployment benefit I. Mr Sommer declared in a report (in German, 103Kb PDF) that Mr Beck’s proposal would be based to a great extent on a concept advocated by DGB. Meanwhile, Mr Beck also indicated that he intended to take up core proposals put forward by the trade unions to improve Agenda 2010. Furthermore, Mr Sommer called for a quick adoption and realisation of Mr Beck’s proposition by the coalition government. In a press release (in German), he urged the governing coalition to modify the laws on modern services in the labour market in line with Mr Beck’s proposal.

On the other hand, the Chair of the Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA), Dieter Hundt, gave a press statement (in German) strongly opposing Mr Beck’s proposal at the beginning of October 2007. In two press statements, Mr Hundt declared that prolonging the length of time during which older employers could receive unemployment benefit I would not lead to their increased participation in the labour market. On the contrary, it would only offer an increased incentive to retire early.

In this context, Mr Hundt drew attention to the growing number of older employees. He highlighted that, during the last seven years, the employment ratio of older workers has increased from about 37% to 50%. This trend was supported by the reforms undertaken as part of Agenda 2010. Mr Hundt, therefore, called on SPD not to jeopardise the positive outcomes of Agenda 2010 by reversing key elements of that particular reform package.

Research findings

A recently published study (in German, 1Mb PDF) by the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung, IAB) indeed indicates that the labour market reforms following the announcement of Agenda 2010 contributed to changed behaviour among unemployed persons. The reforms thus supported higher employment levels.

In the autumn of 2005 and 2006, the IAB conducted a representative survey at company level. About 9,800 establishments from all industrial sectors participated in the survey in 2005, while this number increased to 13,500 enterprises in 2006. The survey tries to analyse, from an establishment point of view, if the behaviour of job applicants, especially unemployed applicants, has changed since the HARTZ-IV reform was passed – that is, since the introduction of more stringent regulations regarding the receipt of unemployment benefit II.

Companies stated that a rising number of job candidates were applying for unsuitable positions, which means that applicants were either lacking the necessary qualifications or were overqualified for the vacant position. About every fifth establishment indicated that unemployed candidates were more frequently willing to make concessions concerning their wages, working conditions or the level of their occupational skills. Such establishments declared that they could, therefore, employ people for positions that were previously hard to fill. New positions had often been created in the low-paid sector.

The analysis attributes the recovery of the labour market, on the one hand, to the economic upturn. On the other hand, the survey findings reveal that every third company that hired new workers established a link between the changed behaviour of job candidates and the introduction of the HARTZ-IV reform.

Sandra Vogel, Cologne Institute for Economic Research (IW Köln)

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