Activating labor market and social policies in Germany: from status protection to basic income support.

VerfasserEichhorst, Werner

1 Introduction

Although Germany has a long-standing reputation as a passive welfare state with elaborate schemes of status-protecting income replacement through social insurance in case of unemployment and a full-blown system of active labor market policies, all benefit systems had formal elements of activation and work requirement--but they had not been enforced systematically. In recent years, however, reforms of active and passive labor market policy were implemented in Germany in order to create a more activating labor market and social policy regime and awake dormant activation principles. Changing the system of unemployment insurance benefits and basic income support as well as the repertoire of active labor market policy instruments and making benefit receipt more conditional upon job search and acceptance of job offers was a major issue on the political agenda. This led to a system shift away from "Bismarckian" status-protecting benefits towards a more "Beveridgean" model of income support with strong activation requirements. In the realm of unemployment benefits the dominant regime is no longer a social insurance benefit but a means-tested flat-rat transfer. The reform of the benefit system also involved a major overhaul of the governance of labor market policy and has far-reaching implications for the logic of the German welfare state. All these reforms generated considerable public attention and interest from foreign observers. This article provides an indepth account of the institutional change, its practical implementation and midterm outcomes and assesses if the desired economic and societal objectives of activation could be achieved through the adopted reforms.

2 The Shift towards Activation

The Legacy of a Conservative European Welfare State

The German welfare state is typically depicted as the prime example of the conservative welfare regime, for which the preservation of social status is central (Esping-Andersen 1990). It has also been prominently characterized as a "frozen welfare state" highly resistant to change (Manow and Seils 2000). Facing a difficult economic environment since the mid-seventies, policy makers and social partners used active and passive labor market policies to reduce labor supply by taking "surplus labor" out of the labor market and shifting the unemployed to benefit schemes and active programs that were not effectively oriented towards swift reintegration into the labor market (Manow and Seils 2000). For some decades, active and passive labor market policies provided a "convenient" and "socially acceptable" way of subsidizing entrepreneurial adjustment to dynamic global markets and help stabilize competitiveness of manufacturing that was at the core of the German employment system (Streeck 1997) while at the same time facilitating a "social policy" approach to unemployment emphasizing income protection and "benevolent" treatment through active policies. Availability of rather generous insurance-based social benefits related to labor market status and skills in the tradition of a "Bismarckian" model helped limiting income inequality and wage dispersion. Rather than creating a flexible and more inclusive labor market, the institutional arrangement of the German labor market of the eighties and nineties was conducive to limiting low-wage employment and wage inequality. This model focusing skilled labor was also stabilized by rather restrictive labor market regulation (Estevez-Abe et al. 2001).

Whereas this institutional pattern helped stabilize the core of the labor market, it also resulted in a strong segmentation of the labor market and high long-term unemployment. However, the German "high equality, low activity" equilibrium (Streeck 2001) resulted in an ever increasing burden of non-wage labor costs as a growing number of benefit recipients in the labor market directly translated into rising social security contributions and fiscal pressure on the state budget that was used to cover deficits in social insurance. Thus, the sustainability of the German "welfare state without work" (Esping-Andersen 1996) was at risk as it tended to erode its own financial basis in particular facing increasing pressure on wage costs stemming from more intense international competition (Manow and Seils 2000).

The old system of unemployment benefits

Prior to the Hartz reforms that came into force between 2002 and 2005, Germany had a three-tier system of income protection in case of unemployment:

* Unemployment insurance benefit (UB, Arbeitslosengeld) provided earnings-related income replacement for a limited duration of up to 32 months if the unemployed had been in employment covered by social insurance for at least 12 months. Unemployment insurance benefits were funded through employer and employee contributions and administered by the Federal Employment Agency which was also in charge of implementing active labor market policies.

* Unemployment assistance (UA, Arbeitslosenhilfe) was a system of means-tested, but earnings-related benefits for long-term unemployed after the expiry of unemployment insurance benefits. Hence, it provided income support for unemployed that had some prior employment experience but had become long-term unemployed. Unemployment assistance was granted for an unlimited period and funded through the Federal budget, i.e. by general taxation. This scheme was also implemented by the Federal Employment Agency, with recipients of unemployment assistance in principle having access to similar active labor market schemes.

* Social assistance (SA, Sozialhilfe), finally, provided basic income protection on a means-tested and flat-rate basis for all German inhabitants--with or without employment experience--who could not rely on sufficient resources from earned income, other social benefits or family transfers. Thus, social assistance was the major protection system for unemployed with either no employment record or unemployment insurance/unemployment assistance claims that did not match the guaranteed minimum income. Social assistance was funded by the municipalities that were also responsible for reintegrating recipients into the labor market through specific active measures.

In comparison to unemployment assistance, means-testing was harsher in social assistance, moreover, any job was considered acceptable. For labor market integration of employable social assistance recipients, a fairly rudimentary labor market policy, the "Help to Work" scheme, was available. It was operated by the municipalities with a considerable scope of discretion. There was no entitlement to integration measures by the public employment service (PES).

All these systems had formal elements of activation and work requirements, but these provisions were not systematically enforced in practice. For example, the "Help to Work" scheme (Hilfe zur Arbeit) incorporated in the Social Assistance Act ([section][section] 18 to 20 BSHG) was based on the "rights and obligation" principle. The BSHG nevertheless failed to state specific provisions on the reasonability of job offers. Court rulings have tended to show that a protection of former occupational status no longer exists. Personal grounds are above all seen in age or sickness, while familial grounds mainly take account of a single parent's care of a child under the age of three. Despite the fact that the law on social assistance called for individual efforts to search for work in order to be able to become independent from public assistance, activating interventions were not implemented systematically. Some local authorities were able to achieve remarkably good results in reintegrating assistance applicants under the "Help to Work" scheme. However, the intensity of activation differed strongly between municipalities, and many local authorities placed social assistance recipients in work opportunities that were covered by social insurance in order to create new entitlements to unemployment insurance benefits. This proved to be an effective way of shifting the burden of transfer payment to unemployment insurance. The fact that the two predecessor schemes of the current Unemployment Benefit II ("Arbeitslosen geld II") were subject to different rules and administered by different bodies hampered efficient activation of recipients.

Suitability criteria in unemployment insurance were also tightened over the nineties. The formal strictness of the unemployment protection regime was increased as legal provisions on benefits being conditional upon willingness to work and accept jobs not equivalent to prior qualification were reformulated in a more restrictive direction with occupational protection being revoked completely in 1997. The main motivation, however, was not effective activation, but short-term fiscal stabilization. At the same time, access to benefits became slightly more difficult, and benefit generosity was reduced marginally. Nevertheless, a rather "permissive" and benefit-centered approach to unemployment was still dominant in practical implementation.

The Hartz reforms

With the number of recipients of unemployment and social assistance benefits steeply rising, largely due to a continuous increase in long-term unemployment, reforming these systems became a priority on the agenda of labor market and social policy. In the late nineties, the problem of fiscal disincentives was more widely discussed, thus paving the way to some pilot projects on joint initiatives of local PES agencies and municipal social assistance offices to reintegrate the long-term unemployed into the labor market ("Mozart initiative"). This was followed by the JobAqtiv Act of late 2001 that, for the first time, aimed at a more coherent activation principle in Germany labor market policies. However, the moderate attempt of JobAqtiv was superposed by the PES placement scandal and the work of the Hartz Commission, a government-initiated expert committee that presented...

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