German politicians tend to evangelise about the Hartz labour market reforms of the early 2000s. Many argue that if other European countries followed Germany’s example, their economies would grow more quickly and enjoy higher employment rates. But in a new CER policy brief, ‘The Hartz myth: A closer look at Germany’s labour market reforms’, Christian Odendahl argues that the reforms were not the main reason for Germany’s economic rebound after 2004. Three other factors were more important:

• business restructuring, which helped the German economy adapt to an increasingly globalised economy;
• wage restraint, thanks to German unions and local works councils from the mid-1990s agreeing to preserve jobs rather than push for wage increases;
• the emerging market economy boom, which raised demand for German exports.

Odendahl argues that the rest of Europe should draw six lessons from the Hartz reforms:

1. Germany got lucky by reforming when demand for its exports was growing quickly. Other countries will not be so lucky.
2. Do not jump too easily to the conclusion that the labour market is responsible for low growth or high unemployment. In Germany’s case, it was only part of the answer.
3. Instead of reforming the entire labour market at once during a slump, as Germany did, countries should focus on investment in training and payroll tax cuts first, and deregulate only when the economy is running at full capacity.
4. Labour market reform and benefit cuts bring hardship, at least in the short term, and increase economic insecurity. Governments should seek to mitigate these problems right from the start.
5. More flexible labour markets do little if anything to boost productivity. Germany failed to complement its labour market reforms with a productivity agenda for those affected most by them.
6. Germany adapted to globalisation so successfully in part because labour unions and works councils were willing to sacrifice wage increases in order to maximise employment. But unions need to be strong enough to demand appropriate wage increases.

Commenting Odendahl said: “It is implausible that reforms targeted at some parts of Germany’s workforce would be the only or even main reason for Germany’s economic rebound. German businesses and trade unions – as well as the worldwide economic boom – did most of the heavy lifting. The rest of Europe, rather than copying these reforms, should learn more nuanced lessons from the German experience.”

Christian Odendahl is chief economist at the Centre for European Reform (CER). More information can be found at www.cer.eu