German unification was undoubtedly a stirring achievement, but it brought its rude awakenings to the country’s policy-makers too. One early discovery was that the number of sustainable jobs in the new Länder (states) was considerably lower than many had expected.
Economics was to prove that point in a painfully short space of time: total employment collapsed in the new Länder from 9.9 million in 1989, which was the year before unification, to 6.5 million by the beginning of 1992. Unemployment rocketed, and the job prospects for many in the former centrally-planned east looked very bleak indeed. Great numbers headed west. The risk of disenchantment with the new Germany grew.
The Kohl government faced a real challenge. Employment had to be stabilised fast and the employment prospects of those without work improved. The immediate recourse was to step up use of so-called active labour-market measures. These are policies whose primary aim is to move the unemployed off the dole and improve their employment chances by either subsidising their employment in the private or public sector, or some non-entrepreneurial employment agencies, or by offering them government-sponsored training programmes.
The idea that governments should shift the balance of their spending away from “passive” income support, such as unemployment benefits, to active measures designed to get the jobless back to work is appealing. Moreover, the idea had the perhaps debatable value of providing otherwise idle people with something to do. True, active measures can be costly and, if they are not targeted narrowly enough, inefficient. Nevertheless, as a report by John Martin at OECD points out, while one should not oversell active labour market measures, their potential role in the fight against high and persistent unemployment should be appreciated.
Germany’s attraction to active labour-market measures is not unusual in Europe. The Scandinavians also use them, as do many other governments, to varying degrees and design. Yet, the track record of many active measures is mixed and the German experience shows the limitations of the programmes. In the east, some 388,000 people participated in job-creation schemes in 1992 and another 489,000 in training measures. But scepticism mounted about the effectiveness of active labour market measures, and when labour-shedding slowed, they were pared back for budgetary reasons. By January 1998 participation in work provision and training schemes in the new Länder had fallen to 177,000 and 125,000 respectively. However, unemployment was still intolerably high, at some 21% of the labour force. Active labour-market measures were therefore ushered back in and given a favourable reappraisal. By November 1998 participation in eastern Germany had reached new highs of 442,000 for job schemes and 181,000 for training.
A long-term problem
Like many of its OECD counterparts, one of the Schröder government’s main policy priorities is to reduce unemployment, in particular long-term unemployment, where those out of work for more than a year account for more than 30% of the total. The new government therefore eased several criteria for the provision of active labour-market measures and in the whole of Germany the plan has been to place more people on active schemes in 1999 than in 1998. Total outlays for active labour-market measures are budgeted to increase by 16.1% in 1999 to 1.2% of GDP. This figure also contains income support to safeguard existing employment in periods of slack demand for construction workers. It accounts for just over half of the amount allocated to unemployment insurance benefits and unemployment assistance.
Still, the hard fact remains that the experience in eastern Germany has not been good. Take the new Land of Saxony-Anhalt. Surveys there show that, in the eight years from 1990 to 1997, only about a third of training scheme participants and a quarter of participants in work provision schemes went on to employment. But while the schemes worked well for those people, most of the rest went back to being unemployed.
Because of the methodology, it is not really possible from the Saxony-Anhalt studies to draw accurate conclusions about the true effectiveness of active labour-market measures compared with other types of support for the unemployed. However, the bulk of the evidence from econometric studies on eastern Germany, which are more rigorous in their approach, indicates that job creation schemes have not been all that effective in bringing people back into regular employment when compared with unemployment benefits. Training and re-training schemes, however, appear to have a somewhat better record in terms of accessing a job, even if the econometric investigations for eastern Germany yield mixed results.
There may be several reasons for these generally disappointing results. People on job schemes may have less time to look for a job than recipients of unemployment benefits. Moreover, job-scheme participants benefit from prolonged eligibility for unemployment-related income support, and this might adversely affect their job search too. Another reason why the schemes might not lead to a job is that many of them simply add little to marketable skills of the unemployed. In fact, in some cases there may even be deskilling. More generally, the poor performance in eastern Germany may partly be due to their lack of focus in what were after all the untried circumstances of a transition economy.
The best is the enemy of the good
Research in other countries suggests that job creation schemes can also be associated with high deadweight costs. That means they entail expenditure which is beyond that normally needed to secure a person’s employment. There is also quite a lot of worker displacement, in that overall employment does not rise but jobs are redistributed between different people.
Indeed, according to a survey by the German Federal Labour Office of companies from east and west (see bibliography), some 14% of the western replies and 22% of the eastern ones thought that the wage subsidies they receive over-compensated for the lower productivity of the supported workers they had hired. Also, of those surveyed, 28% in the west and 30% in the east said they would have hired the same worker anyway, even without financial support. Furthermore, 17% in the west and 22% in the east answered that, without support for the person they hired, they would have employed another person instead.
So, are active labour-market measures worth persevering with? Yes, if one respects their limitations. Active labour-market measures can work, but the evidence from the new German Länder supports the view that they have to be targeted on problem groups and be better managed than some currently are. Increasing the content of market-relevant training in active labour-market schemes would seem to be an important ingredient to raise their success. This could also help to reduce the deadweight costs.
Active labour-market measures are clearly not the magic bullet to solving Germany’s joblessness problem. For as the OECD has been stressing for some time, including in the detailed recommendations of its latest Jobs Strategy, the real key to reducing unemployment in Germany is to bring structural reforms to the labour market, such as by improving the flexibility of wage bargaining. Nevertheless, in the new Länder, where unemployment is much higher than the OECD average, active measures can have a valuable complementary role to play.
• Economic Survey of Germany, OECD, 1999. About book/order here
• Fay, R. G., Enhancing the effectiveness of active labour market policies: Evidence from programme evaluations in OECD countries, Labour Market and Social Policy Occasional Papers, No. 18, OECD, Paris, 1996.
• Federal Labour Office, Institut für Arbeitsmarkt- und Berufsforschung der Bundesanstalt für Arbeit (IAB), “Betriebliche Einstellungshilfen – Erste Ergebnisse zu Förderstrukturen und betrieblichen Rahmenbedingungen”, Werkstattbericht 6/1999, Nürnberg.
• Martin, J., “What works among active labour market policies: evidence from OECD countries’ experiences”, Labour Market and Social Policy Occasional Papers, No. 35, OECD, Paris, 1999.
• OECD Jobs Strategy: Assessing Performance and Policy, Paris, 1999. About book/order here
©OECD Observer No 219, December 1999