A PRESIDENT'S PERSPECTIVE by Hardy Bouillon

Thursday, 28 June 2002

THE LABOUR MARKET'S NEW CLOTHES

As German publicist Roland Baader ones pointed out, if you are going diametrically opposed to the right direction, every deviation, even the slightest one, is an improvement, but still not the right way (Roland Baader, Fauler Zauber. Schein und Wirklichkeit des Sozialstaats, Graefelfing: Resch 1997, p.9ff.). This holds for many of the "reform models". Although they are from time to time improvements (in relation to the status quo), they fall far behind what is possible. Take labour market reforms in Germany. Hartz, Mayence, EITC: There are lots of names and/or models in the current debate about a German labour market reform.

The Hartz model, named after VW manager Peter Hartz, is currently "la dernière cri." It proposes to reverse the burden of proof. Hence the jobless has to prove that he does not get a new job. It also proposes to cut payments earlier and to be more rigid when it comes to the question whether or not a new job offer is reasonable. According to the Hartz model the amount of jobless can be cut down to 50% by the year 2006. How? Well, hard to tell. Just as a food for thought: The Hart model also suggests to make a big share of the jobless factually employees of the job center.

So far, the competing models received less public recognition, although they have some advantages over the Hartz model. In a paper presented at a recent CNE conference, Professor Charles Blankart described the Mayence model and EITC as follows:

"According to the Mayence model (Mainzer Modell), the government should reduce labour costs by taking over low wage earners’ social security contributions (IAB, IAB (2001), Institut für Arbeitmarkt- und Berufsforschung-Materialien 3/2001, http://www.iab.de/ftproots/mat0301.pdf2001). Employers would then be induced to hire those people whose marginal productivity of labour is lower than the gross wage rate consisting of the net wage plus social security contributions. This model has the advantage of being simple. But it is not well balanced. It implies high subsidies for the very low wage earners, but strong negative incentive effects for those higher wage earners whose subsidies are withdrawn.

Alternatively, a group of European economists around Hans-Werner Sinn of CESifo-Institute (2002) wants to promote the system of an earned income tax credit, EITC, as applied in the United States. Under EITC, a wage earner receives an increasing wage supplement in the low wage range, which declines steadily at higher wage rates. Incentives to work are said to be higher under EITC than under the Mayence model (Hans-Werner Sinn, Sinn, Die Höhle in der Eiger-Nordwand. Eine Anmerkung zum Mainzer Modell und zum Wohlfahrtsstaat an sich, ifo Schnelldienst, vol. 55, 3, pp. 20-25.)"

Blankart concludes: "The Mayence Model as well as EITC leave the rest of the labour market regulations undisputed. In this sense they simply superimpose a new regulation on the existing ones. The question therefore remains whether it would not be preferable to change the existing institutions in a way that less regulations are generated."

Reformer or would be reformer of the German labour market should recall what James Gwartney, Florida State University, and Robert Lawson, Capital University, summarize in their most recent "Economic Freedom of the World: 2002 Annual Report":

"There are two major reason why the ratings of the four large continental European nations are lower than those of the U.S. and U.K.: large size of government, weaker legal systems, and more restrictive regulations especially in credit and labor markets."

What is needed is deregulation rather than re-regulation.