A “Serious” Jobs Program: Germany’s Haartz IV (Will Obama Repeat the Elder Bush’s Mistake?)

I am taken aback, to say the least, that I have yet to see a “serious” jobs program offered for our widely proclaimed “jobs crisis.”  We hear mainly Keynesian rhetoric and the wrong policy proposals: Keynesians warn we must increase aggregate demand so that there are more jobs to make the products in greater demand. Also we must continue unemployment insurance to bolster aggregate demand, and, by the way, the unemployed spend every penny, so we get a larger multiplier. On the other side, we get good advice: Economic growth creates jobs; so we must craft a pro-growth fiscal policy which in the long run will create jobs. This position is correct but it offers long-term rather than short term solutions.

Economics 101 texts provide an alternate view of unemployment that has been  overlooked in the current debate. It began with the natural rate of unemployment work of Milton Friedman and Edmund Phelps. They suggested we consider employment and unemployment as yet another of our economic decisions. In the job market, we have people looking for jobs (even those currently employed look for better jobs) and we have jobs being offered. The labor market matches people to jobs via a search process in which employers and job searchers do not have perfect information.

How quickly people find jobs depends on costs and benefits, just like any other economic decision. A longer search might land me a better job than the choices I have right now.  If my spouse is working, the costs of continuing to search are lower. If I have generous unemployment benefits, the costs of remaining unemployed are lower.

This brings me to unemployment benefits and unemployment. In the current debate, the extension of unemployment benefits is perversely presented as a “pro jobs” program. In reality, it is an anti-jobs program. Empirical studies have shown that the unemployed are most likely to accept jobs on the eve of the expiration of unemployment benefits. If policy makers want the unemployment rate to drop, they should not extend unemployment benefits.

A case in point is Germany after 2005, when Germany began to reduce benefits associated with the state of unemployment. In Germany, the unemployment rate fell from 11 percent to slightly over six percent, while unemployment rates were rising elsewhere.

In Germany, the so-called Haartz IV program that was passed in  2004 called for the reduction of unemployment benefits for the long-term unemployed for whom unemployment benefits and “social help” had become an entitlement. Since 2004, unemployment benefits have fallen gradually and new types of jobs have been created that lower the costs of employment to German employers. In 2011, additional adjustments to Haartz IV were made to ensure that people who worked earned more than those who did not. The Haartz IV legislation was passed despite fierce opposition from the SPD, but it is largely credited for the new German miracle – a growing economy located in the heart of Europe with falling unemployment during an anemic world economic recovery.

The U.S. is about to begin its own Haartz IV experiment. Extended unemployment benefits are set to expire, earlier in some states than others. We can therefore capture the effects of expiring unemployment benefits at different times and in different places.  If the search theory of unemployment is correct, we should see a falling unemployment rate first in those states in which unemployment benefits expire first.

The Haartz IV program in Germany also de facto reduced minimum wages. It introduced different types of jobs, one of them called “mini jobs,” that, in effect, set aside minimum wage standards. Employers were encouraged to hire by the offer of low-wage employees.

Currently, the majority of forecasters foresee a high rate of unemployment rate in the United States on Election Day. If the administration wishes to see it lower, they can do two things: First, make sure that unemployment benefit eligibility is not further extended. Second, they must lower the minimum wage, especially for youths.

The unemployment rate measures whether people have jobs or not. It does not measure the quality of jobs. In Germany, the main reason for the falling unemployment rate is the fact that people, who earlier would not have taken jobs below their expectations, now do. The same will be true for the United States. All we will see will be a falling unemployment rate.

George H.W. Bush was bullied by Congress into extending unemployment benefits in the run up to his reelection campaign against Bill Clinton. Although the unemployment rate was dropping on election day, it was still too high. It gave Clinton the opening to claim, almost comically,  “the worst economy since the Great Depression.”