Can Germany’s long-term unemployment miracle offer lessons for U.S.?

Zachary Roth
Senior National Affairs Reporter
The Lookout

Increasingly, America's employment crisis is a long-term unemployment crisis.

For the last two years, layoffs have been relatively rare, yet nearly 14 million Americans remain out of work. Of those, nearly 6 million--a near-record 45 percent--have been unemployed for six months or more. And the average unemployed person has been looking for work for more than nine months--an all-time high since records began in 1948. What's more, the longer people are unemployed, the harder it is for them to find a job.

In other words, addressing the long-term unemployment problem will go a long way toward solving the unemployment problem itself.

And that's why it's worth looking closely at one country that's managed to drastically reduce the ranks of its long-term unemployed: Germany. What, if anything, can the German experience teach us?

Beginning in 2003, Germany undertook a series of reforms designed to increase the flexibility of its labor market, cut unemployment and boost economic growth. Among many other provisions, the measures--known as the Hartz Reforms after Peter Hartz, the Volkswagen executive who led the task force that created them--cut the amount of time for which many job-seekers can receive benefits.  They also made it impossible for job-seekers to turn down a job and continue receiving full benefits--now, job-seekers who turn down job offers deemed to be reasonable see their benefits significantly reduced.

Making jobless benefits less generous has upped the incentive for the unemployed to look for work. "The search intensity of the unemployed has increased, because it's become more painful to stay unemployed," Sabine Klinger, an economist with Germany's Institute for Employment Research, told The Lookout.

But the reforms also approached the problem from the other end, by establishing a rigorous support program to help people find work, and ensuring that people take advantage of it. Previously, explained Jennifer Hunt, a professor of labor economics at McGill University in Montreal, Germany didn't institute any requirement for recipients of jobless benefits to search for work. Now, unemployed people must work with government case managers to find openings, meeting monthly numerical targets for job applications. They also must take part in trainings to prepare them for job interviews. If they don't participate in the program, they can have their benefits cut.

The results speak for themselves. In 2004, before the reforms had fully gone into effect, Germany had nearly 1.7 million people who had been out of work for over a year. By last year, it was down to 966,000--a decline of a whopping 43 percent.

Of course, it wasn't just those changes that led to the reduction. Germany's broader economic reforms helped spur job growth, in part by making it easier to hire and fire workers. Not surprisingly, many of the new jobs, Klinger said, were the kind of low-wage, flexible jobs that tend to be filled by the long-term unemployed, who have fewer options.

In other words, the long-term jobless rate came down in part simply because the number of job openings, especially low-wage job openings, increased. By the same token, however we treat the unemployed, America will need U.S. employers to start creating more openings before its jobless numbers start looking better.

And even after the improvements, Germany, like most European countries, still lags behind the United States when it comes to long-term unemployment. According to Hunt, 45 percent of Germany's unemployed last year were long-term unemployed. That's the same as the current U.S. figure--but here's the crucial difference: In Germany, long-term unemployment is defined as being out of work for more than a year. Here, that definition kicks in after six months without a job.

So what does all this mean for the United States? It's worth keeping in mind that jobless benefits here are far less generous than they were in Germany before the reforms. So the outlay in jobless benefits is not likely to cause a large number of Americans to avoid looking for work. Indeed, the evidence suggests that at their current levels, jobless benefits reduce, rather than increase, unemployment, by injecting stimulus into the economy, which spurs growth.

So cutting unemployment benefits likely wouldn't have the same positive impact here as it did in Germany--though David Leonhardt of the New York Times argued recently that cuts to the Social Security disability program, and to public pensions that encourage early retirement, might function in a similar way.

But the other side of the equation--a concerted government effort to match the jobless with openings--could hold promise. That's especially true if, as many observers argue, part of the unemployment problem stems from a mismatch between the skills that workers in a given location have and the jobs that are available.

Perhaps more important than any of the policy details, Germany showed that, with the necessary political will, long-term unemployment can be brought under control. But with Washington offering little more than a few cosmetic fixes right now, it's that crucial element of political will that's most conspicuously lacking.

(German Chancellor Angela Merkel and President Obama at a State Dinner, June 7, 2011, in the Rose Garden of the White House: AP Photo/Pablo Martinez Monsivais)