IZA - Electronic Archive

At the end of 2005, Germany is wavering between "reform-willingness" and "reform-weariness". The first steps at modernizing the country’s economy and welfare state are only slowly taking effect. Given the widespread misgivings about a strict continuation of the chosen path, policymakers and society are faced with enormous challenges in the fields of federalism, the labor market, budget balancing and taxation, healthcare, pensions and intergenerational fairness, education and research, and family policy.

Renowned authors give recommendations

In view of the huge tasks ahead of the new Grand Coalition of Christian Democrats and Social Democrats, IZA Director Klaus F. Zimmermann has gathered a team of leading economists, who comment on these issues in a provocative but constructive manner. The authors have contributed twenty articles on the most important challenges that will shape Germany’s future. The result is a multi-faceted volume, which critically addresses the crucial economic and social issues of our time.

Among the authors are: Bert Rürup (Chairman of the German Council of Economic Experts), Wolfgang Wiegard (Member of the German Council of Economic Experts), Thomas Straubhaar (President, HWWI Hamburg), Michael Hüther (Director, IW Cologne Institute for Business Research), Rüdiger Pohl (University of Halle-Wittenberg), Friedrich Breyer (University of Konstanz), Claudia Kemfert (DIW Berlin), Charles B. Blankart (Free University of Berlin), Hilmar Schneider (IZA), Gebhard Kirchgässner (University of St. Gallen), Gert G. Wagner (Research Professor, DIW Berlin), Bernd Raffelhüschen (University of Freiburg), David B. Audretsch (Max Planck Institute of Economics, Jena), Georg Meran (Vice President, DIW Berlin), Friedrich Schneider (University of Linz), Hans-Georg Petersen (University of Heidelberg), Alfred Steinherr (Head of Department for Macro Analysis and Forecasting, DIW Berlin), and Christian von Hirschhausen (DIW Berlin).

Published in German language under the title "Deutschland – was nun? Reformen für Wirtschaft und Gesellschaft" (Germany – What Next? Reforms for Economy and Society), this scientifically well-founded yet easy-to-read book explains how Germany got into its current predicament – and what can be done to get the country back on track. As the synthesis of the various articles shows, there is no more room for a wait-and-see approach to the problems that need to be tackled by our policymakers over the next years. This is why the volume wants to encourage the political reformers to stay on course and implement effective reforms for a lasting modernization of the country.

Strong political leadership needed

The outcome of the federal elections in September 2005 is a good basis for a socially symmetric reform policy. A Grand Coalition can speed up reforms that were previously slowed to by partisan bickering. But this raises expectations and the pressure to succeed, which – in the interest of the country – no political player should try to evade. The necessary reform spirit in society, however, can only be generated if policymakers muster the courage and strength to undertake painful steps that might well upset their constituency. Most importantly, they must convince the people that only an effective reform policy can guarantee long-term prosperity and prevent economic exclusion. Politicians too often find themselves caught between the realization that courageous action can no longer be postponed and the temptation to keep procrastinating in order not to "overburden" their voters.

The new book "Deutschland – was nun?" demands from policymakers that they focus on long-term needs rather than relying on cosmetic short-term effects. The contributing economists share the hope that Germany will eventually succeed in embarking on the necessary reforms. It must be kept in mind, however, that most of the modernization measures will not have an observable impact any time soon. Even in the best-case scenario, no one can promise a substantial improvement of the labor market situation over the short term. The inevitable reorganization of our welfare state to provide stronger incentives and more intergenerational fairness will require substantial sacrifices from the German people, which cannot be offset – but merely alleviated over time – by lower taxes. A massive reduction of subsidies will not only rely on a competitiveness assessment for entire industries but also on a reorientation among interest groups towards the collective good. The necessary reform of the German educational system is a vital investment in our future, but it is not a magic wand that can immediately eliminate the human capital deficits that impede our economic performance. The same is true for family policy or climate control. Progress in all these areas will largely depend on a liberating move towards a new federalist structure, which cannot itself be achieved in the short run.

Wagner | Schneider | Niebel | Zimmermann

This is why a strong political leadership in the new Grand Coalition is all the more important. Its historical precedent in the years between 1966 and 1969 is not remembered for political inertia, but much rather for its remarkable progress particularly in the field of economic policy. Germany's second Grand Coalition must hold itself to the highest expectations and is literally "doomed to success". The book proposes ways to achieve this success.

Together with Dirk Niebel, Secretary-General of the Free Democratic Party (FDP), Klaus F. Zimmermann, Hilmar Schneider and Gert G. Wagner (DIW Berlin) presented the book to the public in Berlin on January 18, 2006 (see picture on the right).

[more information]

The "IZA Prize in Labor Economics", awarded annually since 2002, has become one of the most distinguished international awards in economics. Starting in 2006, IZA will additionally establish the "IZA Young Labor Economist Award" to honor an outstanding published paper in labor economics written by young researchers. To qualify for the award, all authors of the paper must be younger than 40 years of age at the time of publication. The prize money of 5,000 Euros is shared between the authors.

The selection process starts with nominations sent in by IZA Research Fellows. The nominated papers will then be screened by the IZA Program Directors, who will propose three papers each. On the basis of these proposals, the prize-winner(s) will be selected.

The first IZA Young Labor Economist Award for a paper published in 2004 will be awarded in fall 2006.

"The establishment of this award reflects IZA's strong ambition to support young and aspiring academics. It is meant to provide an additional incentive for this group to conduct high-quality research in labor economics," explained IZA Research Director Armin Falk.

When charities enclose a few postcards as gifts with their solicitation letters, the volume of donations increases substantially. This has been established by IZA Research Director Armin Falk in a field experiment.

Falk, who is also Professor of Economics at the University of Bonn and Director of the Bonn Laboratory for Experimental Economics, has investigated the behavior and motives of potential donors in cooperation with a charitable organization that sent out 10,000 solicitation letters. One third each of the letters contained a small gift (a postcard), a large gift (four postcards) or no gift.

The study showed that gifts increase both the number of donors and the amount donated. One single postcard resulted in 17 percent more respondents. With several cards, the number of donors even rose by 75 percent. Those who received no gift donated a total of 16,606 Euros. The small gift raised the amount to 17,584 Euros - and the large gift to 26,518 Euros. "Apparently the donors feel obliged to repay the value of the gift," Falk explains. "The results confirm that most people's behavior is marked by reciprocity rather than selfishness. In other words, they reward behavior perceived as generous or fair - even if that implies personal expenditure."

But what would happen if all charitable organizations were to send out gifts? "It is difficult to say whether total donations would increase," Falk says. "Most donors probably have a self-imposed ceiling on donations, but they would be more likely to give this maximum amount to organizations that provide gifts. Ultimately, it would be a zero-sum game."

The complete study is available as IZA Discussion Paper No. 1148.

Axel Weber debating with Hilmar Schneider

Axel Weber, President of the German Bundesbank, was the invited guest speaker at the IZA Tower Talk on November 24, 2005. In his speech on the opportunities and risks of globalization, he emphasized the urgent need for reforms of the German labor market. The former economics professor at the universities of Bonn and Cologne warned not to make the globalization phenomenon a "scapegoat for home-made problems". Based on a number of economic facts, he concluded that Germany is clearly among the beneficiaries of international economic integration. Since the actual victims are much rather found in Africa, which has been largely excluded from the benefits of globalization, Weber called for a comprehensive removal of trade barriers for these countries.

For Germany, in contrast, globalization is like a vitamin treatment for the ailing welfare state and the labor market, Weber explained. "We need a whole pillbox to cure these patients", he said. While the right prescriptions are readily available, policymakers are still reluctant to administer the much-needed medicine. In order to solve the structural problems of the welfare state, health insurance and long-term care insurance should be disconnected from labor costs, collective bargaining regulations and layoff protection should become more flexible, and public subsidies should be shifted from declining to aspiring industries, particularly the service sector. The time for reforms is running out, Weber warned, as demographic change would severely aggravate the problems from 2010 on.

Hilmar Schneider, IZA Director of Labor Policy, agreed with Weber that it must be doubted whether the new federal government will have the strength to implement effective reforms against the expected public opposition. While the Grand Coalition offers an opportunity to overcome the political standstill, the diverging ideologies and interests of the involved parties could just as well stand in the way of a far-reaching reform strategy.

[more about the IZA Tower Talk event series]

Zimmermann | Mortensen | Pissarides | Wulf-Mathies | Pfann

On October 24, 2005, this year's IZA Prize in Labor Economics was awarded to the economists Dale T. Mortensen (Northwestern University) and Christopher A. Pissarides (London School of Economics) during a festive ceremony that took place in Berlin before an audience of invited guests from Germany and abroad. The award honors the joint work by Mortensen and Pissarides on search and matching processes in the labor market. Their research has proven highly relevant for the current labor market reforms in Germany and supports the government policy to provide job-seekers with proper incentives and to shorten unemployment spells by reducing search costs through more efficient job placement.

The IZA Prize Committee, which selected the prize-winners, was coordinated by IZA Director Klaus F. Zimmermann and IZA Research Director Armin Falk and included Nobel Prize laureates George A. Akerlof (University of California, Berkeley) and Joseph Stiglitz (Columbia University, New York) as well as Richard Portes (London Business School). The nominations for the IZA Prize were submitted by the network of IZA Research Fellows. According to the Award Statement, the "IZA Prize in Labor Economics 2005 honors the pioneering work of these two exceptionally creative scholars, who have revolutionized theoretical and empirical labor market research."

The high-level IZA Prize Conference "Frontiers in Labor Economics" preceding the award ceremony included presentations by such renowned U.S. economists as Richard Freeman (Harvard University), who lectured on the future of unions, and Nobel laureate James Heckman (University of Chicago), who analyzed the effects of cognitive and non-cognitive abilities on labor outcomes and social behavior. Tito Boeri (Bocconi University, Milan) praised the achievements by Mortensen and Pissarides in promoting methodological progress in labor economics.

The invited speaker at the award ceremony, acting Minister of Finance Hans Eichel, not only applauded the prize-winners' contributions to labor market research, but he also emphasized the important role of IZA in the evaluation of the recent labor market reforms in Germany. During the subsequent panel discussion on "Reform Policy after the Federal Elections", Freeman, Heckman, Eichel, Zimmermann and IZA Prize-Winner Pissarides shared their views on a variety of topics ranging from unemployment insurance, minimum wages, union power and the low-wage sector to retirement age and VAT increases.

The discussion, as well as the entire event, was moderated by German television anchor Cherno Jobatey. The program had started with a welcome address by Monika Wulf-Mathies (Managing Director for Policy and Sustainability, Deutsche Post World Net). Filling in for the CEO of Deutsche Post and IZA President Klaus Zumwinkel, who had to cancel on short notice, she praised the successful cooperation between Deutsche Post and IZA owing to the science sponsoring activities of the Deutsche Post Foundation.

In his personal laudation, Gerard Pfann (Maastricht University) focused more closely on the academic achievements of the prize-winners and their contributions to the development of labor economics. The analyses by Mortensen and Pissarides have led to a better understanding of unemployment and job flows. Their models, which are now widely used in labor economics and macroeconomics, have highly enriched research on unemployment as an equilibrium phenomenon, on labor market dynamics and on cyclical adjustment. They show how the intensity with which workers search and the decision when to accept a job offer determine the distribution of unemployment durations. A major policy implication is the insight how labor market institutions such as unemployment insurance, minimum wage laws or job centers can be used to influence unemployment durations. For instance, if the level of unemployment benefits or the entitlement periods are reduced, job seekers will increase their search intensity to shorten their unemployment spell. At the same time, firms will be more willing to offer additional jobs as they find it easier and lest costly to fill their vacancies.

After the IZA Prize was presented by Monika Wulf-Mathies and Klaus F. Zimmermann, Dale Mortensen explained in his acceptance speech how his joint work with Christopher Pissarides had started and developed in the 1980s. He said he was deeply honored and moved to receive this award in recognition of their successful long-term collaboration.

Read more:
Press Statement | Award Statement | IZA Prize Homepage | CV Mortensen | CV Pissarides | Handelsblatt Article | LSE Announcement

We are pleased to announce that IZA has developed a virtual data service center as part of a project supported by the Federal Ministry of Education and Research. The IZA "meta-database" facilitates the search for and within datasets that have been identified by IZA Research Fellows as highly relevant for labor economists. All these datasets are available with technical, legal and content information. They are easily searchable in a standardized way, e.g. for questions and variables. Another advantage of the IZA data service center is that documentation previously only available in German has been translated to English.

In addition to this publicly accessible service, authorized researchers can now analyze several datasets by means of controlled remote data processing. The jobs are submitted online or via e-mail to IZA, which performs the analyses in a timely fashion and sends the results back to the submitter.

Complete information on the IZA Data Service Center is available at: metadata.iza.org

In April 2005, IZA launched a project on the "Economics and Persistence of Migrant Ethnicity". Together with seven other project groups, IZA forms a study group on Migration and Integration financed by the Volkswagen Foundation. Research findings are regularly exchanged at workshops. The IZA project is headed by IZA Director Klaus F. Zimmermann, IZA Program Director Barry R. Chiswick, IZA Senior Research Associate Amelie Constant and IZA Research Fellow Don DeVoretz (Simon Fraser University, Canada).

The project provides a multidisciplinary understanding of the costs and benefits of ethnicity and migration. The need for additional knowledge on these issues has further increased in view of the effects of globalization, demographic change, and sluggish economic growth in many parts of the world. Migration and ethnic diversity are often viewed as a blessing and a curse for societies. A major topic of the IZA project therefore deals with assimilation and persistence of ethnicities. One of the key objectives is to identify the forces that determine immigrant performance in terms of citizenship, interethnic marriages and self-employment, as well as to define and measure the ethnic capital of immigrants.

On October 6-7, 2005, at the first workshop on Migration and Integration in Berlin, IZA representatives presented their initial research findings. For more information on the workshop and all individual study groups, please refer to: http://vw-migration-project.iza.org

In his function as President of the German Institute for Economic Research (DIW Berlin), IZA Director Klaus F. Zimmermann has analyzed the election programs of the German political parties. The study, authored jointly with IW Köln, assesses each party's position on labor market issues, taxation, the pension system and health insurance.
The "election check" is available in German language only. [read more]

A recent study by IZA Research Director Armin Falk and other IZA researchers jointly with experts from the German Institute for Economic Research (DIW Berlin) analyzes the relationship between personal characteristics, risk-taking behavior and life satisfaction. The experimentally validated study is based on data from more than 20,000 interviews with German individuals. Strikingly, the study finds that people who are more willing to take risks tend to be more satisfied with life.

The respondents of the survey were asked to assess their risk attitude on a scale from zero (= complete unwillingness to take risks) to ten (= complete willingness to take risks). In addition, they were asked to estimate what fraction of 100,000 euros won in a lottery they would invest, given an equal chance of doubling the money or losing half of it within two years.

The analysis reveals several facts: (1) women are less willing to take risks than men, at all ages; (2) increasing age is associated with decreasing willingness to take risks; (3) taller individuals are more willing to take risks; (4) individuals with highly-educated parents are more willing to take risks.

In order to measure the difference between self-assessment and actual behavior, 450 randomly selected individuals were invited to participate in a lottery with an equal chance of winning 300 euros or nothing at all. They were given the option to play the lottery or accept a fixed amount. The behavioral analysis confirmed the results of the survey.

Risk-taking behavior also seems to play a role in career choice. Self-employed individuals are more willing to take risks while civil service employees are much more risk-averse.

The study was a cooperative effort of IZA and DIW Berlin under the co-authorship of Armin Falk, Thomas Dohmen, David Huffman, and Uwe Sunde (IZA) with Jürgen Schupp and Gert G. Wagner (DIW Berlin).
The complete text is available as IZA Discussion Paper No. 1730. [Abstract] | [Volltext in PDF]

IZA Director Klaus F. Zimmermann has been appointed to the Group of Societal Policy Analysis (GSPA) of the Bureau of European Policy Advisors (BEPA). On October 6, the GSPA will meet in Brussels for the first time under the chairmanship of the EU Commission President, José Manuel Barroso, in order to discuss the sustainability of the European social models.

The Group of Societal Policy Analysis is one of three newly established advisory groups of the BEPA and deals with such topics as labor market and social reforms in the EU Member States, as well as science, technology, European values and culture.

As a department of the European Commission, the Bureau of European Policy Advisors reports directly to the President of the Commission and advises him and other members of the Commission on the fields of economics, politics and society. The recommendations of the BEPA have a strong influence on the policy decisions of the Commission and the President. Zimmermann will participate in this expert group as an independent and internationally renowned economist.

In an interview with the German daily "Lübecker Nachrichten", IZA Director Klaus F. Zimmermann called for a longer working life. This proposal, which has entered the public debate under the catch phrase "Retirement at 70", has triggered a heated debate. The following documents (available in German only) contain some of the arguments made in regard to this controversial topic.

- Letter to the editor in Tagesspiegel online (August 21, 2005)
- Article in Süddeutsche Zeitung (August 18, 2005)
- Interview in Bonner General-Anzeiger (August 13, 2005)
- Interview in "Lübecker Nachrichten" [PDF] (August 10, 2005)

In eastern Germany, the number of right-wing extremist crimes per capita has been three times higher than in the western part of Germany in the past years. A recent study published as IZA Discussion Paper No. 1540 debunks the common belief that this discrepancy is due to east-west differences in socialization. According to the findings by IZA Research Director Armin Falk (also University of Bonn) and IZA Research Fellow Josef Zweimüller (University of Zurich), one of the main causes is the higher unemployment rate in the east. A comparison between officially registered right-wing crimes and unemployment figures shows a significant correlation: The higher the unemployment rate, the more right-wing extremist crimes were committed. This formula, however, is only valid above a certain unemployment threshold. Other regional differences such as the share of young men in the population, per-capita spending on youth and welfare benefits, the share of foreigners, or the crime-solving rate did not explain the observed discrepancy between the federal states.

"In times of economic crisis, latent racism tends to surface, and people are less willing to stand up for foreign-born compatriots. This sort of climate nurtures right-wing extremist crime," explained Falk. "What our study does not say is that right-wing crimes are predominantly committed by unemployed individuals. The linkage is much more complex. A high unemployment rate also raises existential fears among the working population. In such an environment, the courage to stand up against right-wing extremism decreases, which in turn encourages those who commit the criminal acts. About 80 percent of the east-west difference in the crime rate can be attributed solely to diverging unemployment figures."

- Download complete study [PDF]
- Bonn University press statement (in German)

For more than six years now, the bilingual IZA Compact Newsletter provides up-to-date information on the institute's activities to a growing subscriber base around the world. We believe this is long enough to warrant a redesign of our layout. Any feedback you may have on the new look is more than welcome at compact@iza.org.

The current issue includes reports on recent IZA activities and new books as well as a comprehensive summary of the IZA reform proposal for the German unemployment insurance. Read also what IZA Director Klaus F. Zimmermann regards as the major challenges for the next German government.

The online version of the newsletter and instructions on how to subscribe to the free print issue are available at IZA Compact.

Zimmermann

In a recent ranking by the renowned German daily Handelsblatt, IZA Director Klaus F. Zimmermann (who is also President of DIW Berlin) is the only German economist to be listed among the Top 10 in terms of both research (5th) and media presence (4th).

Only three other economists receive a Top 25 ranking in both categories. Zimmermann deplores this obvious dualism between researchers and communicators: "An economist who engages in policy advice should also have a strong position in research." But unlike their American colleagues, "many of Germany's top economists are too reluctant to interact with the media."

The ranking results underscore IZA's successful strategy to conduct high-quality scientific research while at the same time providing effective policy advice. The Handelsblatt article also highlights the role of Bonn as a center of academic excellence. Apart from the highly productive economics faculty at the University of Bonn, the Bonn Graduate School of Economics (BGSE), with which IZA cooperates closely, is lauded as a pioneer in graduate education. According to the article, progress in this area has the largest potential to advance Germany's international position in economic research.

[Online version of the article (in German)]
Download (PDF): Research Ranking | Media Presence Ranking | University Ranking | Article on Klaus F. Zimmermann

Falk

Falk ranks 4th among German economists under 40

Among the German economists aged under 40, IZA Research Director Armin Falk achieves 4th place according to a ranking published by the German economics weekly Wirtschaftswoche. The magazine had asked a number of renowned German economics professors to name the best junior economists. The Top 10 positions were then assigned on the basis of each candidate's publication record in the most important academic journals. Falk is Full Professor of Economics at the University of Bonn and Director of the renowned Bonn Laboratory for Experimental Economics.

The complete text of the article is downloadable (in German) as a PDF document.

Trust in employees may have a strong positive impact on their voluntary performance, while too much control has a strong demotivating effect. These are the findings of a recent study by IZA Research Director Armin Falk (also University of Bonn) and Michael Kosfeld (University of Zurich) on the "hidden cost of control".

The study is based on behavioral experiments with 144 Swiss students, who were given the roles of principal and agent (or "boss" and "employee"). They were able to adjust their performance (or control efforts) according to the behavior of the other side. The experiment showed that the negative effects of strong control on employee motivation were dominant. Although the presence of extensive control mechanisms can stimulate performance, the employees' motivation and voluntary performance diminished when control was perceived as a sign of distrust. Even a high level of control will probably result in a level of employee performance that could have been achieved by trust as well.

Ultimately, however, there is no perfect solution for employee control. Motivation, of course, also depends on other factors. It is important for the employer to examine the available incentive mechanisms and to distinguish between "intrinsically motivated" and "opportunistic" employees. For instance, if the employer has only weak incentives at his disposal, it may be better to trust since controlling demotivates the intrinsically motivated employees but only marginally increases the performance of opportunistic employees. As incentives get stronger, however, the disciplining effect will eventually dominate the demotivating effect.

Source: A. Falk/M. Kosfeld, Distrust: The Hidden Cost of Control, IZA Discussion Paper No. 1203 [download full text]

Klaus F. Zimmermann

Klaus F. Zimmermann, Director of IZA and President of the German Institute for Economic Research (DIW Berlin), was elected Director of the Executive Board of the Association of German Economic Research Institutes (ARGE) in April 2005. He succeeds IZA Fellow Thomas Straubhaar (President of the Hamburg Institute of International Economics, HWWA), who had held this office since 2001.

Zimmermann emphasized the significance of the ARGE institutes' scientific excellence and political independence. "In view of the enormous economic policy challenges ahead, the ARGE institutes play a key role as providers of scientifically founded concepts and solutions. Our policymakers must continue the reform process that has been started in the German economy and society. The providers of policy advice in Germany are well positioned to offer these services based on the highest scientific standards."

The newly or re-elected Assistant Directors are Ulrich Blum (IWH Halle), Johann Eekhoff (University of Cologne), Wolfgang Franz (President of ZEW Mannheim), Hans-Werner Sinn (President of ifo Institute, Munich) and Thomas Straubhaar. Dennis Snower (President of IfW Kiel) and Christoph Schmidt (President of RWI Essen) will continue to hold this position.

The ARGE members - DIW Berlin, HWWA, ifo, IfW, IWH and RWI - produce the renowned spring/fall joint forecasts on "The State of the World Economy and the German Economy".

J. Stiglitz

The nomination period for this year's IZA Prize in Labor Economics 2005 started on March 10. More than 500 IZA Research Fellows have the right to nominate candidates for the fourth IZA Prize. The prize-winner will be selected by a committee including Nobel Prize laureates George Akerlof (University of California, Berkeley) and Joseph Stiglitz (Columbia University) as well as CEPR President Richard Portes. Stiglitz replaces Gary Becker (University of Chicago), who had been on the committee for the previous three years. IZA Director Klaus F. Zimmermann and Research Director Armin Falk will again coordinate the selection process.

The annual prize is awarded for outstanding academic achievement in the field of labor economics. It is meant to stimulate research that tries to find answers to the important labor market policy questions of our time. Past prize-winners are Jacob Mincer, Orley Ashenfelter and Edward Lazear.

[more information on the IZA Prize]

B. Chiswick

Immigration has become a significant public policy issue in all of the developed countries, as well as an important area of study for academic researchers. IZA Program Director Barry R. Chiswick (University of Illinois, Chicago) has been a pioneer in research on the economics of immigration and has published numerous seminal studies on the labor market, the educational and linguistic adjustment of immigrants, and their impact on the host economy. He has also written extensively on various aspects of immigration policy. "His contributions have marked the pace of research on migration for over two decades, provoking the right questions and guiding the field," said IZA Director Klaus F. Zimmermann.

[enlarge]

Now Chiswick's most influential and widely-cited papers, published over a span of 25 years in a variety of journals and conference volumes, are available in a single volume entitled "The Economics of Immigration". It contains a foreword by Nobel Laureate Gary S. Becker (University of Chicago and IZA) and an original introductory essay by the author. The collection is available from Edward Elgar Publishing [more information].

Chiswick, Barry R. (2005), The Economics of Immigration. Edward Elgar Publishing, Cheltenham, UK. 424 pages.
ISBN 1-84376-458-X.

Hüther | Straubhaar | Zimmermann

On March 11, 2005, a reform proposal to stimulate economic growth and employment was put forward to German policymakers by IZA Director Klaus F. Zimmermann jointly with Michael Hüther, Director of the Cologne Institute for Business Research (IW Köln), and Thomas Straubhaar, President of the Hamburg Institute of International Economics (HWWA). The proposal contains an immediate action program consisting of three components:

1. Lowering unemployment insurance contributions and abolishing the "solidarity surtax" while raising the value-added tax.
2. Extending the legal provisions for temporary employment contracts and considering (in the medium run) the replacement of layoff protection with severance pay schemes.
3. Reducing bureaucracy with regard to legal restrictions on the use of future technology and other regulations impeding employment (e.g. the planned anti-discrimination act).

Read the press statement and the full-text proposal (both only available in German).

In a study published by the Bertelsmann Stiftung, IZA analyzes different ways to reform the system of mandatory unemployment insurance. Possible alternatives to the current system, which provides too many disincentives, range from experience rating (where the employer contribution is based on firing behavior) to a wage insurance for the long-term unemployed (where government subsidies make low-paid jobs more attractive) and personal insurance accounts to promote individual initiative.

The study, authored under the direction of Hilmar Schneider, offers an integrated reform proposal for a redesigned unemployment insurance system. Its key element is the introduction of flexible premium options that would take into account reemployment prospects, private insurance plans, and risk aversion of the individual. Such a reform would cut the cost of unemployment insurance in half without giving up the desired balance between social solidarity and individual responsibility.

Schneider, Hilmar/Marcus Hagedorn/Ashok Kaul/Tim Mennel (2004), Reform der Arbeitslosenversicherung (Hrsg. von der Bertelsmann Stiftung). Gütersloh. ISBN 3-89204-736-7.

Peer Steinbrück

At the IZA Tower Talk on January 13, 2005, the Northrhine-Westphalian Minister President Peer Steinbrück gave a speech on the topic “Between welfare state and bazaar economy: The future of social labor market policy in Germany”.

He underscored the need to vigorously pursue the “Hartz” reforms, calling them the most far-reaching labor market and social policy reforms in post-war Germany. But he also warned not to expect short-term employment effects from these programs. Steinbrück harshly criticized the tendency of the German public to resort to the “vale of tears” and called for more optimism in modernizing society and economy. He praised the recent achievements in such fields as tax reform, which he deemed successful, even in an international comparison, although he referred to the 1990s as a “lost decade”.

Educational policy is at the core of Steinbrück’s reform proposals. The goal should be to lower the average age of job market entrants and to improve the job prospects of low-skilled workers through education and training. At the same time, Germany should counter the demographic decline by tapping unused human capital potential, such as the group of high-skilled young mothers, through better childcare facilities.

Steinbrück was avidly opposed to the “bazaar economy” theory, which holds that Germany suffers from globalization as the country’s export balance increasingly contains assembled products for which parts were previously imported from low-wage countries. He pointed at Germany’s distinctly positive trade balance with Eastern Europe. According to Steinbrück, there is no reason to be pessimistic as Germany stands to profit from a more intensive division of labor, particularly with the new EU member countries.

In the subsequent discussion with Hilmar Schneider, IZA Director of Labor Policy, Steinbrück rejected the call for additional tax breaks. Instead he pleaded for using a larger share of tax revenues to pay for social security in order to take some of the financial burden off the labor market. The Minister President explicitly lauded the IZA research activities and the institute’s contribution to the scientific evaluation of the “Hartz” reforms.