While southern Europe is still struggling with the European debt crisis, Germany’s economy has, despite minor dents, not come to a halt and so far has withstood any recessive tendency. Especially in Germany, people seem to see a connection between Gerhard Schröder’s Agenda 2010, which was a labor-market reform, which began in 2003. The implementation occurred mainly until 2005 and focused on a liberalization of the labor market. A Japanese researcher even claimed to have found the exact impact, which these reforms have on Germany’s current economic success (Spiegel Online, 2013).
So far so good. But like many economic puzzles, objective answers will, if ever, not be found soon. But there are indications that help us find informed evaluations. One of those very interesting indications is to compare Germany with Italy. Both countries are one of Europe’s major economies, decentralized, technology exporting, just to name a few similarities. More importantly, Italy also liberalized its labor market massively.
For Germany as well as Italy, these labor-market reforms improved unemployment. So what happened, that Italy is back with unemployment and a miserable economy? This is far from an exhaustive analysis, but there seem to be long-term effects, which have not yet reached Germany.
The effects of these reforms are a dual labor-market, with low-paid unskilled workers and privileged high-paid skilled workers. This works well, as long as the economy is booming and wages keep rising. When Italy hit the crisis in 2008, jobs were lost and without a major social safety net, people lost their income. How does a country get back on its feet? Similar to developing countries implementing Import-Substitution-Industrialization, a functioning internal market is imperative for international competition. But Italians stuck in low-paid and temporary jobs fail to create a functioning market. In Scandinavia, where unemployed are caught by a solid safety net (flexicurity), people keep their purchasing power and therefore, the economy does not dry out, as soon as the external inflow decreases.
Despite all the praise for a liberal labor market in Germany, we should see what the long-term effects are and more importantly not implement liberal labor-market policies, without an environment, supporting it.