Final Report of the Hartz Commission: More Bad Than Good

Proposals made by the German Hartz Commission (German unemployment benefit agency) cannot all be tarred with the same brush. Each module for innovation deserves separate consideration. Some modules seem to promise improvements, whilst the core component of the reform, the implementation of staff service agencies (Personalserviceagenturen, PSAs) remains unacceptable in its current form.

PSA - Mega HR Agencies or "Cherry Picking" Rather than Helping Problem Groups

Wherever possible, the employment offices, which were restructured into job centres, are supposed to provide all people of working age and recipients of welfare payments with employment in a PSA after six months. The PSA selects unemployed persons according to their employment chances, hires them on a fixed-term contract and later contracts them out to private employers as government “temp” workers. Individuals receive lower levels of pay than they would from private employers. This neutralises protection from dismissal. Or, put more bluntly, the government bears the costs of its own labour market policy. Once they hold a contract with a PSA, unemployed persons are liable to pay social security contributions. During probation, they receive a wage equal to the amount received as unemployment benefit. They later receive a wage equal to the tariff amount agreed with the PSA. The ruling for recipients of social welfare payments remains unclear. If the job seeker rejects a reasonable offer made by the PSA, his unemployment benefit as well as possibly also his social security payments, will be reduced. Only job seekers who really cannot find employment will be willing to work for pay equal to the level of unemployment benefit. Unemployed persons with rather good chances in the labour market are therefore incentivised to seek regular employment as quickly as possible.

The advantage of using temporary workers from PSAs for private employers is that they cost significantly less than private "temps". This is because PSA workers are subsidised by the government. If subsidisation makes government temporary workers of the same skill composition cheaper than their private counterparts, private jobs are replaced. This also results in an increased risk of so-called revolving door effects: companies fire employees in order to hire subsidised PSA workers.

Furthermore, PSAs could take some of the unemployed persons out of the statistics, moving them out of the public eye. Registering a significant number of the unemployed as government temporary workers enables official figures to be significantly reduced on paper. Meanwhile, huge public HR agencies emerge, their "employees" being part of a barely seen, separate statistic that also lists participants of job-creation schemes as well as early-retired workers.

If private temporary employment agencies are allowed to operate staff service agencies (market solution), this could lead to "cherry picking". As only successful lending of temporary workers results in profits for these employment agencies, they will pick only the cream of the crop from the pool of unemployed individuals. This reduces the danger of huge public HR agencies developing, but it hardly helps the labour market's problem groups who simply become ignored.

What are the disadvantages of labour division between the state and private temporary employment agencies? A widely deregulated temporary labour market does not require public subsidy. The PSAs will care exclusively for the labour market's problem groups. According to a study of the Centre for European Economic Research (ZEW), this is proven to have positive effects on employment.

Job Centre: Lean Management or OTT Bureaucracy?

As an organisational change in the Federal Labour Office, the Hartz Commission proposes that various bodies (employment and social agencies etc.) which have thus held responsibility for various tasks now delegate these in their entirety, to the so-called job centres. This is designed to prevent delays caused by bureaucratic processes between agencies. The ratio of case managers to customers (job seekers) shall also be improved from 200 to one, to 60 to one. This change reflects findings from research carried out using various models. The use of case managers is, however, de facto, a new concept in the field of employment. Workers in employment agencies must first receive re-training which is of course associated with considerably high costs.

The so-called, quick allocation system (Quick-Vermittlung) which should begin immediately after a worker has been fired, means that job centres are overwhelmed with customers. Last year, around seven million job seekers registered as unemployed. The number of fired workers who registered with the Labour Office is unknown. What are the disadvantages of a stronger division of labour between state and private temporary employment agencies?

The Hartz Commission not only proposes that job centres consider job seekers as customers, but also employers. The allocation of jobs requires that businesses alert job centres of as many open positions as possible. This change is to be welcomed. How far this should go, however, is not yet clear. All in all, there is a risk that the changes proposed by the Hartz Commission could result in increased bureaucratic pressures – the opposite of an efficient management system which was the original aim of reforms.

New Reasonable Regulations - a Sensible Proposal

The "reasonable" nature of new regulations is the most important point of change. Following implementation of new regulations, job seekers will have to prove their willingness to work. If they do not do this, they risk their unemployment and social welfare payments being cut. In addition, further criteria have been proposed, according to which greater regional and labour flexibility will be demanded from job seekers. Such natures to increase “reasonableness” are particularly a result of the rather strained labour market in East Germany, whilst certain regions in West Germany are simultaneously experiencing shortages in personnel.

What's Missing in the Proposals?

Despite initial discussions of consolidating unemployment benefit into a single lump sum payment in order to simplify management and administration processes, no concrete proposals have now been made for generally reducing the value and duration of unemployment benefit. It is regrettable that the Commission has been unable to implement a comprehensive reform of the unemployment insurance and social welfare benefit system – the creation of an innovation module in this area in particular was after all, the original aim of reform.

All in all, the Commission does not deserve to be the object of usual criticisms which accuse it of addressing only allocation processes whilst failing to address the issue of creating more jobs. This, however, is not the task of the Hartz Commission. Indeed, it can be expected that the successful allocation of jobs, or a reduction in the period of unemployment, will serve to significantly reduce unemployment, even if not to the extent claimed by the Commission. Problems in the labour market, and particularly in East Germany, cannot be addressed by improved allocation alone.

Contact

Dr. Alexander Spermann, E-Mail: spermann@zew.de

Dr. Bernhard Boockmann, E-Mail: boockmann@zew.de

Michael Feil, E-Mail: feil@zew.de

Prof. Dr. Tobias Hagen, E-Mail: hagen@zew.de

Prof. Dr. Thomas Zwick, Phone:0621/1235-131, E-Mail: zwick@zew.de