Labour market reform in Germany: fact or fiction?

Recent employment statistics indicate a remarkable change from historical patterns, which have shown a strong increase in structural unemployment in each of the last three decades. Although the German economy did not grow in 2003, employment has contracted by only 1%, while unemployment has even started to fall mildly since Spring 2003. This note surveys whether these changes can be attributed to actual changes related in particular to the “Hartz” labour market reforms, which brought a wide array of individual measures to ease labour market rigidities. It is shown that, while changes in the way unemployment is registered explains much of the statistical change, there are indeed also first signs that the labour market is becoming more flexible. The full impact of labour market reforms will, however, only become visible over the next few years. The extent to which these measures will prove effective also depends crucially on their being accompanied by structural reforms in other parts of the economy.