The Hartz reforms ... and their lessons for the UK

Document type
Gaskarth, Glyn
Centre for Policy Studies
Date of publication
1 October 2014
Employment, Poverty Alleviation Welfare Benefits and Financial Inclusion
Social welfare
Material type

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Only a few years after German reunification, the German economy began to stagnate. Between 1994 and 2002, it grew by less than the EU average. The GDP growth rate was only 1.6% between 1995 and 2001. One of the key problems with the stagnating economy was the high unemployment rate. 13.4% of the German population (including those in labour schemes) were unemployed in 2002. Additionally, the German welfare system was seen to be notably over-generous to claimants. This resulted in employers shifting work abroad to find cheaper labour and unemployed persons having no incentive to find work. Ultimately, this led to a reduction in the demand for labour in Germany. In 2002, German Chancellor Schröder convened a Commission under his friend Peter Hartz (the Personnel Director of Volkswagen) established to reform the labour market, and address the high unemployment rate. Following the Hartz Commission’s recommendations, four reforms were enacted in stages between January 2003 and January 2005. These new laws included:

  • the creation of Personal-Service-Agentur to act as temp agencies to place unemployed people with employers;
  • a grant for entrepreneurs, known as the “Ich-AG” (Me, Inc.), to encourage new businesses;
  • benefit cuts of up to 30% if a person on unemployment benefits refused to take up a reasonable offer of work;
  • merging social welfare benefits with long-term unemployment benefits.

Though the reforms were largely unpopular, they are credited with creating 2.5 million jobs for the German economy and helping the German labour market remain strong through the recession. Currently, in the UK, both Conservative and Labour Parties are discussing reforms to wages and benefits. Reforms are necessary, but politically unpopular. The Hartz Reforms can serve as a lesson for the UK by showing how this policy needs to be carefully designed and slowly implemented

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