Writing just before the recent German election, Tom Krebs and Martin Scheffel
confirm that Tullock and Buchanan were on the right track;
...the Hartz reforms were quite successful. Between 2005 and 2008 the unemployment rate fell from almost 11% to 7.5%, barely increased during the Great Recession, and then continued its downward trend reaching 5.5% at the end of 2012. This view is shared by many economists in Germany and confirmed in our recent macroeconomic study of the Hartz reforms based on a calibrated search model (Krebs and Scheffel 2013). Specifically, we find that the Hartz IV reform reduced the non-cyclical unemployment rate in Germany by 1.4 percentage points. We further find that the Hartz I-III reforms decreased the non-cyclical unemployment rate in Germany by 1.5 percentage points. Thus, our analysis suggests that the entire reform package let to a permanent reduction in the German unemployment rate by almost three percentage points!
A good thing...but not for everyone;
Hartz IV resulted in a significant cut in the unemployment benefits for the long-term unemployed, and this group therefore experienced a welfare loss. Most interestingly, the short-term unemployed also lost even though Hartz IV did not reduce their unemployment benefits, but the prospect of less insurance in the case of becoming long-term unemployed is enough to make them resist the reform. Finally, low-skilled workers with precarious jobs are in a similar position as the short-term unemployed and many of them are likely to lose as well. Indeed, our study suggests that the Hartz IV reform reduced real wages, a prediction that is consistent with the data....
But not enough losers to cost Angela Merkel the election.
The welfare losses experienced by unemployed workers and workers with precarious jobs provide a simple explanation of the unpopularity of the Hartz reforms, and in particular Hartz IV. Clearly, those who expect to lose from the reform will oppose the reform, and our quantitative welfare analysis shows that this segment of the German population is large, though not the majority. However, even if the reform losers are not the majority, it can well be that unions and politicians will support their concerns by promising to roll back the reforms. For example, if the reform losers are a clearly defined group with individually large and sometimes dramatic losses, but the reform winners are a diffuse group with only small and indirect gains for each individual, then a rational politician interested in winning elections will run on a platform that calls for reversing the reforms or not implementing them in the first place.
This time the Calculus of Consent
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