At the turn of the millennium, the Nobel Prize-winning economist Amartya Sen wrote that Europe “has continued to accept worklessness – and its increase – with remarkable equanimity.” While this reprehensive observation still seems to hold, it is especially worrying with regards to youth unemployment. In 2000, 18 percent of Europe’s under 25-year-olds were jobless.
Today, the figure has risen to 22.5 percent, with the lowest rate being Germany’s 7.6 percent and the highest Greece’s at 59 percent. France is somewhere in the middle with 25.4 percent. In light of these differences, it seems natural that governments should seek inspiration from Germany when they decide, as Sen would have it, to no longer equanimously accept the catastrophic job perspective of its future generations. Glancing at Germany’s job market, many consider that a set of reforms introduced in 2003 under the chancellorship of Gerhard Schröder and drafted by a commission led by Peter Hartz, then the human resources executive for VW, are an essential cause of the country’s relative stability. The question is whether these reforms, also known as Agenda 2010 and Hartz Laws I-IV, can and should be applied to other European countries.
The downside of Hartz’s approach
Earlier this year, Peter Hartz, who has – with the exception of some corruption charges in 2006 – disappeared from the headlines, paid a surprising visit to François Hollande. The French press was alarmed. Amidst discussions about national labor reforms, Hartz’s comeback on the political stage quickly triggered rumors about the Germanification of France’s extremely regulated labor market. In an extensive analysis on Mediapart, a journalist described the meeting as yet another sign of the French president’s breach with good old social democratic values. Jean-Luc Mélenchon cursed Hartz in a television interview for BFMTV as “dreadful” and added that “there is no need for Hollande to consult [Hartz]. He already does his politics.” The Third Way is growing into a highway.
What did the Hartz reforms do? Briefly put, they subscribed to several supply-side policies for reducing unemployment. The idea of such supply-side policies is to improve the quality and quantity of labor. Increasing the amount of labor productivity, it is supposed, leads to more productivity in general, and so the productive potential of the economy improves as well. In the case of Germany, this policy was euphemistically described as “support and challenge” (fördern und fordern). More specifically, it resulted in pushing job-seekers to perform better by lowering their financial power, i.e. by cutting unemployment benefits, loosening employment protection, and unfastening the social security system. This has created a flourishing low-wage sector and effectively increased the desired productivity.
The downside of this approach is that it has done little to make room for more demand. Germany’s Hartz reforms may have led to a weakening of workers’ bargaining power, but they have hardly improved Germany’s domestic economy. Indeed, throughout the last decade, the only growth stimulus to Germany’s economy has been demand from abroad, while the incomes of private households have been neglected. From 1999 to 2010, when the labor market reforms were fully underway, the poorest 40 percent of households lost income while high-earning households saw their incomes rise strongly. A 2012 study from the German Institute for Economic Research calculated that, between 2002 and 2010, the increasingly unequal distribution of incomes encouraged the average savings ratio, driving down consumer demand. The study estimated that without this inequality, annual German consumer spending would have been up to 10 billion euros higher. It is this kind of perspective of future demand that usually incites businesses to hire and invest. But business investment is still low in Europe as firms worry about the lack of demand.
Massive low-wage sector throughout Europe
Despite of the failure of the supply-side-oriented approach to unemployment, Europe continues to steer the course of its labor reforms in this direction. François Hollande has now officially subscribed to supply-side policies and hence announced a shift in France’s long-time tradition of demand-side economics. In January he announced during a press conference in the Elysée that “it is upon supply that we need to act.” In the meantime, 44.5 percent of France’s firms, according to a survey conducted by the French Statistical Office, Insee, certify that they are facing demand difficulties.
This week, Peter Hartz has presented a series of concepts to fight youth unemployment across Europe. Together with advisers from the private and public sector, he created a program called europatriates which was presented in Saarbrücken in late June. The initiative is backed by the Commission, and José Manuel Barroso sent a video message in which he gave his blessings to the program, describing himself as a europatriate. The europatriates program provides six solutions for Europe’s unemployed youth, all of which have, unsurprisingly, a strong supply-oriented propensity.
The program seeks to increase labor productivity by optimizing the product, i.e. the unemployed. The hope is that businesses will resume investing and hiring if the quality of the potential workforce rises. For that, the europatriates have come up with several ideas. For instance, unemployed people should let their strengths be determined by talent diagnosis tests and then choose among hundreds of services – from color adviser to Twitter ghost-writer – whose availability and location will be detected by Big Data analysis. In order to increase labor market flexibility, the europatriates opt for spreading out with short-term positions and are developing programs to help unemployed southerners gain temporary work experience in the north. While these policies are relatively modest (although Hartz estimates 215 billion euros for his project), they commit the same errors of Hartz’s prior reforms, most strikingly by focusing exclusively on the broadening of a massive low-wage sector throughout Europe.
Little time left
The German model is currently deemed the way out of the crisis. With the recent Pacte de responsabilité, which is supposed to loosen social security contributions, and the Crédit d’impôt pour la compétitivité et l’emploi (CICE), which provides tax relief for companies paying the minimum wage, France is imitating the German approach. It is, however, a mistaken approach: it fails to acknowledge the demand side, especially the incomes of private households, thus increasing inequality and undermining stable recovery in Europe. Tackling youth unemployment in Europe is of most urgent necessity. The current policy must change course – fast.