Readers Question Evaluate the likely effectiveness of two policies that german government could introduce to increase labour market flexibility.
Recently, the German government have introduced a variety of reforms to try and tackle the high rates of unemployment in Germany. These policies have included:
- It’s easier to hire and fire.
- It’s more tax-efficient to set up a small firm.
- Unemployment and welfare benefits have been cut and rolled into one, to force people to leave what the Germans call the “soziale Haengematte”, the welfare hammock.
- People who have been without a job for a long time are offered poorly-paid “one-euro jobs” in the public sector, to help them get used to regular work again.
- The employment offices have been restructured to provide more localised services.
If we take cutting unemployment benefits. The idea is that this provides an incentive to look for work and accept lower paying jobs. In theory lower benefits increase the motivation to get a job rather than stay on the welfare system.
However, as the above article highlights, this becomes a problem when jobs are not available. In other words people have a strong incentive to get a better paid job, but there aren’t enough jobs going – particularly a problem in current recession. Cutting welfare benefits will also create an increase in relative poverty.
Making it easier to hire and fire workers reduces the cost of taking new workers on, but it may lead to more temporary employment. So some workers may get taken on but it creates more job insecurity in the workforce.
1 comment so far ↓
I don’t agree with the second para of your response to the German proposals when you say “this becomes a problem when jobs are not available”. This is very near to the “lump of labour” fallacy, i.e. assuming a constant number of vacancies or jobs. The flaw in your point, seems to me, is thus.
Given expanding employment (in the aggregate), the marginal product of labour declines (as Keynes and others pointed out). This incidentally is a rare example of a phenomenon that occurs at both the micro and macro-economic level. When the marginal net revenue product of labour declines to the minimum wage / union wage etc, employment cannot rise any further. I.e. the economy has “hit NAIRU”.
However if labour is then made available at a lower rate, e.g. via the “one Euro jobs” which you cite, aggregate employment can then be raised a bit (or to put it more accurately, NAIRU can be lowered). I have devoted an entire thesis to this point at http://mpra.ub.uni-muenchen.de/14206/.
Re your criticism that the German proposals “may lead to more temporary employment”, my answer would be that temporary employment is better than unemployment. Moreover, there is a bizarre phenomenon in most developed labour markets, namely people employed “permanently” with temporary employment agencies: i.e. people who are “permanently employed” doing a string of temporary jobs! This phenomenon presumably occurs because demand for temporary labour by employers greatly exceeds the supply of people willing to do temporary jobs.
Thus if the German proposals create X temporary jobs, I doubt the number of temporary jobs would rise by X. The effect would be that a number of the above people in “pseudo permanent jobs” would get genuine permanent jobs, while a roughly similar number of people brought into work by the German proposals would then do the temporary jobs which the “pseudo permanent” employees used to do. I.e. the net effect should be a rise in permanent AND temporary employment.
Leave a Comment