Germany's jobless

Economist.com | Five million reasons to worry : From The Economist Global Agenda: "Over 5m Germans were without a job last month, more than at any time since the Great Depression. The government cannot solve the unemployment problem without first making it worse.

The numbers are a little less resonant when adjusted for the season; the aftermath of Christmas never flatters the labour market. Taking this seasonal effect into account would reduce the jobless count to 4.71m, the statistics office said, an unemployment rate of 11.4%. More importantly, the new year also brought a new policy. On January 1st, after parliamentary tussles and street protests, the government’s controversial reform of unemployment benefits came into effect. This reform, driven forward by Gerhard Schröder, the chancellor, is supposed to prod the jobless back into work. But its first effect was to prod many who had dropped out of the labour market back on to the unemployment rolls.

Under the “Hartz IV” reform, named after Peter Hartz, the man who proposed it, those who have been unemployed for over a year receive a flat-rate benefit, means-tested and paid only to those who seek work seriously. Previously, not everyone on long-term aid had to sign on at job agencies. Now they do. The labour office reckons that at least 222,000 people not counted as unemployed under the previous system are now registered as such.

Labour markets rarely function perfectly. But Germany’s labour market is not really a market at all. It abjures free competition, which it likens to the law of the jungle. Firing is a last resort. Wages are negotiated collectively. These clubby, consensual arrangements served Germany well for several decades after the war, winning the country an enviable industrial peace. But they have now become, in effect, a conspiracy of insiders against outsiders. The 5m outsiders, who lack a job, might be prepared to work for less than those who have a job. But employee protections and union rules insulate the insiders from any competitive threat the outsiders might offer. As a result, the insiders maintain wages above the level that would make it profitable for employers to hire those out of work.

The French enshrined this fallacy in law in 1998, ruling that no one could work more than 35 hours a week. But such a restriction has proved hard to live with. The law has been weakened several times, and on Tuesday the French National Assembly began debating ways to remove the last of its teeth. Germany’s overhaul of the benefit system, by contrast, raises the supply of labour, relaxing the limits on the country’s economic performance.

Unfortunately, the German economy is still far from testing those limits. Inflation is low, leaving plenty of room for the economy to expand. But the animal spirits of households and firms are falling short. Indeed, some economists worry that efforts to resolve Germany’s supply-side problems may be worsening the economy’s demand-side difficulties. A reform that adds 222,000 people or more to the jobless totals may do little to bolster household confidence and spending. Retail sales fell in December, for the third month in four."