From 2003 to 2018, employment in Germany increased by 7.3 million, or by 19.3 % – growth not observed since unification. This “labor market miracle” was marked by a persistent and significant expansion of both part-time and low-wage jobs and a deterioration in pay for these jobs, while total hours hardly increased; overall wage growth returned only after 2011. These developments followed in the wake of the landmark Hartz reforms (2003–2005). A modified framework of Katz and Murphy (1992) predicts negative correlation of wages with both relative employment and participation across cells in the period following these reforms. In contrast, wage moderation alone should generate positive association of wages and participation. Our findings are most consistent with a persistent, positive labor supply shock at given working-age population in a cleared labor market. An alternative perspective of labor markets, the search and matching model, also points to the Hartz IV reforms as the central driver of the German labor market miracle.
This paper updates and extends Burda and Seele (2016).
Funding statement: This research was supported by Collaborative Research Center (SFB) 649 and the Forschungsschwerpunkt 1764 of the German Science Foundation (DFG). Disclaimer: neither author has received financial or other compensation for this research, nor does it necessarily represent the position of the VDMA or the INSM.
We are grateful to Michael Böhm, Bernd Fitzenberger, Albrecht Glitz, Maarten Goos, Amanda Gosling, Juan Jimeno, Tom Krebs, Andrey Launov, Christian Merkl, Thomas Steger and anonymous referees for helpful comments and to Tobias Bergmann, Thomas Dengler, Niklas Flamang, and Tobias König for capable research assistance.
Appendix A Decomposition of total hours into full-time and part-time hours: A shift-share approach
Hours worked H are decomposed into full-time F and part-time P hours as follows:
The change in total hours over the interval is decomposed into 1) the change in full-time workers weighted by the average hours worked by a full-time worker in period t; 2) the change in the hours per full-time worker, weighted by the number of full-time workers in ; 3) the change in part-time workers weighted by the average hours worked by a part-time worker in period t; 4) the change in hours per part-time worker, weighted by the number of part-time workers in .
Appendix B Data description
B.1 German wages: Imputed hourly wages from SIAB and GSOEP
Previous studies analyzed hourly wages for Germany by using the earnings surveys, the micro census (both provided by the Federal Statistical Office), or, more commonly, the German Socio-Economic Panel (GSOEP). Unfortunately, at the individual-level, neither the quarterly earnings survey, nor the micro census are freely available for research. Social security records, namely the Sample of Integrated Labour Market Biographies (SIAB), contains an imputed daily wage at the individual level, but lacks information about working hours. The GSOEP is used frequently because it is freely accessible for research and it contains information about monthly wages and hours worked per week.
In both micro data sets, all socially insured employees in full-time or part-time work are grouped by the following categories: age groups, gender, place of residence, and qualification. In addition to the previously described differences in the two surveys, variables such as employment status, qualification or wage have different definitions. To aggregate both micro data sets in groups is meaningful only, if these aggregates are conditional on corresponding characteristics in both data sources.
The conceptual discrepancy, i. e. definitions of variables and respondents of the two data sources, lead to differences in the wage measures in levels and its growth rates. However the two wage measures are highly correlated in levels as well as growth rates. An hourly wage measure is imputed in a synthetic panel based in group means of working hours from the GSOEP and median gross daily wages from the SIAB. The synthetic panel fills a lack in limited availability of hourly wage information for socially insured employees of all firm sizes.
B.2 Construction of relative wages and relative employment
The relative wage is defined as:
which is weighted by the relative employment . The relative, weighted employment is defined as:
Appendix C Generalization of Katz-Murphy (1992) to endogenous labor supply, market clearing and rigid wage cases
C.1 Marshall: Market clearing
The model can be extended in a straightforward way to include endogenous labor supply with an analogue of Equation (5). Let labor supply be and assume that it is “everywhere upward-sloping” in the sense that Z contains the marginal utility of wealth (the Lagrange multiplier from the canonical labor supply problem), and that contains only substitution effects. Market clearing implies
and for the case of stable demand
which is a quadratic form in the vector . The fact that is negative definite plus imply that .
C.2 Pigou: Introducing wage rigidity
The wage is a linear combination of market clearing and exogenous rigid wage :
where ϕ is a constant that controls the extent of wage rigidity in the economy. The change in the market-clearing wage is the change in the Marshallian outcome, so after substitution
Because labor force participation equals labor supply, we have
The inner product is given by
This will form the basis of predictions regarding the correlation of wages and participation.
C.2.1 Case of wage rigidity shocks only
If and then
which is a quadratic form in the positive definite matrix ; as wage rigidity disappears (), approaches zero (since no other shocks are active by assumption). In the rigid wage case with wage shocks operative, relative wages and relative participation should covary positively. Note that this effect exists only as long as wage rigidity is relevant ().
C.2.2 Case of labor supply shocks only
Suppose instead that shocks to wage rigidity are absent and labor demand is stable , but labor supply shocks are operative . Then and , so
D.1 Basic structure and continuation values for labor force participants
The exposition follows Mortensen and Pissarides (1999) and Pissarides (2000) and omits well-established proofs. The mass of total working population is fixed at 1, and can be in one of three labor market states: unemployment (u), nonparticipation (ℓ) and employment (). When out of the labor force, the worker receives monetary equivalent flow at each point in continuous time. Each worker in the labor force has a valuation of nonparticipation described by a continuous cdf . b is the unemployment benefit paid to those searching for work (Arbeitslosengeld I), and ε measures the flow value of being outside of the labor force – leisure, value of education, social welfare (Arbeitslosengeld II), plus cost of active job search, all measured as a fraction of the unemployment benefit.
First, we study the sub-system conditional on labor force participation. In the steady state, the continuation valuations of the two possibilities for workers participating in the labor market (ILO definition) U and W are defined by functional equation
for unemployed workers. The prime (′) refers to the state in the next instant (after has transpired) conditional on a new draw of x (a shock actually having occurred). Similarly, for firms producing with a worker of productivity x
The reservation level of productivity R is the level of the idiosyncratic productivity shock x below which mutually agreed dissolution of the match occurs; there are no involuntary separations in this model. Shocks occur in the interval with Poisson incidence rate λ and x is distributed according to a time-invariant c. d. f. .
The participation constraint implies
The wage, which serves to divide the match surplus, is determined by Nash bargaining:
with first order condition
The solution for the (state contingent) wage is
which, given the reservation level of utility can be rewritten as
A free-entry condition for vacancy posting by firms:
Constant unemployment implies :
which completes the model. The unemployment rate is , where the separation rate s and nonparticipation ℓ are yet to be determined.
D.2 Modeling the participation margin
Following Pissarides (2000, Chapter 7), stock equilibrium between states of nonparticipation and unemployment is determined by indifference between participation and unemployment for the marginal worker with identity , there are no frictions between the two states. While all workers value the state of unemployment at and receive identical income in nonparticipation (), each worker is heterogenous with respect to nonparticipation, described by a cumulative distribution function , which also gives the worker’s unique identity on , with having the highest, and having the lowest (periodic) monetary valuation of nonparticipation. Aggregate equilibrium reflects indifference at the margin between participation and unemployment for the marginal worker, satisfying
The mass of nonparticipation ℓ is thus given by
Workers with low values of ℓ have the highest valuation of non-work time and are least likely to participate. Note that the right hand side is either parametric (b, β, c) or is endogenous and determined by free entry and zero profit condition on vacancies (θ).
We consider comparative-static changes in parameters b, β, and A; b describes the monetary periodic flow value to job searchers relative to ε. Because , non-participation in equilibrium will be interior: .
In steady-state, , and . The firm’s valuation equations for the two states plus the free entry/exit condition for vacancies imply ; labor market tightness θ is fully determined by model parameters and the matching function according to
and RU into LP leads to the LP curve.
D.4 Comparative statics
We seek expressions for the following derivatives of equilibrium reservation productivity R, labor market tightness θ, and labor force nonparticipation ℓ with respect to the “Hartz-parameters” matching efficiency A and income of searching unemployed b, as well as worker bargaining power β. Total differentiation of JD, JC and LP, eliminating using RU and substituting , with and all other model parameters held constant, yields the following linearized system in , , and :
where the functions g and x are evaluated at steady state values. Defining
we can use Cramer’s Rule to derive the following comparative statics results:
Using the JC curve , the last expression can be rewritten as
Balleer, Almut, Britta Gehrke, Wolfgang Lechthaler, and Christian Merkl. 2016. “Does Short-time Work Save Jobs? A Business Cycle Analysis.” European Economic Review 84:99–122. 10.1016/j.euroecorev.2015.05.007Search in Google Scholar
Burda, Michael C., and Jennifer Hunt. 2011. “What Explains the German Labor Market Miracle in the Great Recession?” Brookings Papers on Economic Activity 42(1): 273–335. 10.3386/w17187Search in Google Scholar
Burda, Michael C., and Stefanie Seele. 2016. “No Role for the Hartz Reforms? Demand and Supply Factors in the German Labor Market, 1993–2014.” No. 2016-010. SFB 649 Discussion Paper. Search in Google Scholar
Dustmann, Christian, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener. 2014. “From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy.” Journal of Economic Perspectives 28(1): 167–188. 10.1257/jep.28.1.167Search in Google Scholar
Economist. 1999 (Accessed: 2015-08-23). “The Sick Man of the Euro.” http://www.economist.com/node/209559. Search in Google Scholar
Eichhorst, Werner, and Paul Marx. 2011. “Reforming German Labour Market Institutions: A Dual Path to Flexibility.” Journal of European Social Policy 21(1): 73–87. 10.1177/0958928710385731Search in Google Scholar
Engbom, Niklas, Ms Enrica Detragiache, and Faezeh Raei. 2015. “The German Labor Market Reforms and Post-unemployment Earnings.” Number 15-162, International Monetary Fund. 10.5089/9781513531250.001Search in Google Scholar
Fahr, René, and Uwe Sunde. 2009. “Did the Hartz Reforms Speed-up the Matching Process? A Macro-Evaluation Using Empirical Matching Functions.” German Economic Review 10(3): 284–316. 10.1111/j.1468-0475.2008.00457.xSearch in Google Scholar
Gernandt, Johannes, and Friedhelm Pfeiffer. 2007. “Rising Wage Inequality in Germany.” Journal of Economics and Statistics (Jahrbücher für Nationalökonomie und Statistik) 227(4): 358–380. 10.1515/jbnst-2007-0403Search in Google Scholar
Hartung, Benjamin, Philip Jung, and Moritz Kuhn. 2018. “What Hides Behind the German Labor Market Miracle? Unemployment Insurance Reforms and Labor Market Dynamics.” CEPR Discussion Paper No. DP13328. 10.2139/ssrn.3338708Search in Google Scholar
Hochmuth, Brigitte, Britta Kohlbrecher, Christian Merkl, and Hermann Gartner. 2019. “Hartz IV and the Decline of German Unemployment: A Macroeconomic Evaluation.” Technical report. 10.2139/ssrn.3390250Search in Google Scholar
Jacobi, Lena, and Jochen Kluve. 2007. “Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany.” Zeitschrift für Arbeitsmarkt Forschung – Journal for Labour Market Research 40(1): 45–64. 10.2139/ssrn.900374Search in Google Scholar
Katz, Lawrence F., and Kevin M. Murphy. 1992. “Changes in Relative Wages, 1963–1987: Supply and Demand Factors.” The Quarterly Journal of Economics 107(1): 35–78. 10.3386/w3927Search in Google Scholar
Klinger, Sabine, and Thomas Rothe. 2012. “The Impact of Labour Market Reforms and Economic Performance on the Matching of the Short-term and the Long-term Unemployed.” Scottish Journal of Political Economy 59(1): 90–114. 10.1111/j.1467-9485.2011.00570.xSearch in Google Scholar
Krause, Michael U., and Harald Uhlig. 2012. “Transitions in the German Labor Market: Structure and Crisis.” Journal of Monetary Economics 59(1): 64–79. 10.1016/j.jmoneco.2011.10.003Search in Google Scholar
Krugman, Paul. 1994. “Past and Prospective Causes of High Unemployment,” in Reducing Unemployment: Current Issues and Policy Options, Proceedings of the Jackson Hole Symposium, Federal Reserve Bank of Kansas City, 49–80. Search in Google Scholar
Lindbeck, Assar, and Dennis J. Snower. 1986. “Wage Setting, Unemployment, and Insider-outsider Relations.” American Economic Review 76(2): 235–239. Search in Google Scholar
Möller, Joachim. 2010. “The German Labor Market Response in the World Recession – de-mystifying a Miracle.” Zeitschrift für Arbeitsmarktforschung 42(4): 325. 10.1007/s12651-009-0026-6Search in Google Scholar
Mortensen, Dale T., and Christopher A. Pissarides. 1994. “Job Creation and Job Destruction in the Theory of Unemployment.” The Review of Economic Studies 61(3): 397–415. 10.2307/2297896Search in Google Scholar
Mortensen, Dale T., and Christopher A. Pissarides. 1999. “New Developments in Models of Search in the Labor Market.” Handbook of Labor Economics 3:2567–2627. 10.1016/S1573-4463(99)30025-0Search in Google Scholar
OECD. 1994. “The OECD Jobs Study, Evidence and Explanations.” OECD Paris (I and II). Search in Google Scholar
Pigou, Arthur C. 1933. The Theory of Unemployment (1933). London: Macmillan. Search in Google Scholar
Pissarides, Christopher A. 2000. Equilibrium Unemployment Theory. MIT press. Search in Google Scholar
Price, Brendan. 2016. “The Duration and Wage Effects of Long-Term Unemployment Benefits: Evidence from Germany’s Hartz IV Reform.” MIT Working Paper. Search in Google Scholar
Rinne, Ulf, and Klaus F. Zimmermann. 2012. “Another Economic Miracle? The German Labor Market and the Great Recession.” IZA Journal of Labor Policy 1(1): 1–21. 10.1186/2193-9004-1-3Search in Google Scholar
Rogerson, Richard, Robert Shimer, and Randall Wright. 2005. “Search-theoretic Models of the Labor Market: A Survey.” Journal of Economic Literature 43(4): 959–988. 10.3386/w10655Search in Google Scholar
Seele, Stefanie. 2019. “Essays on the German Labor Market Since Unification.” Doctoral Dissertation, Humboldt-Universität zu Berlin, 9–21. Search in Google Scholar
Sinn, Hans-Werner. 2003. Ist Deutschland noch zu retten? München: Econ. Search in Google Scholar
Stops, Michael. 2016. “Revisiting German Labour Market Reform Effects – A Panel Data Analysis for Occupational Labour Markets.” IZA Journal of European Labor Studies 5(1): 1–42. 10.1186/s40174-016-0064-3Search in Google Scholar
© 2020 Walter de Gruyter GmbH, Berlin/Boston