Why Germany’s unemployment stands at 5% when Spain’s is at 25%
Mario Draghi speaks about Eurozone unemployment at Jackson Hole (Part 7 of 11)
Heterogeneity of labor markets
The Eurozone is characterized by its labor market’s heterogeneity. Heterogeneity refers to the labor market’s lack of flexibility and its reform among the 18-nations in the Eurozone. Heterogeneity can be seen in the wide disparity in unemployment rates between the 18 nations. The Eurozone’s current unemployment rate is 11.5%. It’s the unemployment rate’s weighted average. It’s close to 5% in Germany and 25% in Spain.
The difference in unemployment rates between the countries is connected to structural developments in the labor markets. The heterogeneity is a result of different initial conditions like employment’s varying sectoral compositions. Also, unemployment rates have historically been higher in some Eurozone countries than others.
The role of reforms
In the past, economies that have weathered the crisis better in terms of employment are also the ones with more flexibility in their labor markets. For example, Germany displayed relatively stronger employment performance during the crisis period. It followed to the Hartz reforms.
The Hartz reforms
The Hartz concept, also known as Hartz reforms, is a set of recommendations. A commission submitted the recommendations to the German labor market in 2002. The concept was named after the head of the commission, Peter Hartz. The recommendations became part of the German government’s Agenda 2010 reform series. The committee devised 13 “innovation modules” that recommended changes to the German labor market system.
By January 1, 2005, the Hartz reforms had been implemented in Germany. Through these reforms, Germany was able to reduce employees’ working time by reducing overtime hours, greater working time flexibility at the firm level, and extensive use of short-time work schemes. This reduced Germany’s unemployment rate. It’s below the Eurozone’s average. The reforms have had a positive impact on the German economy. The impact can be gauged by the performance of exchange-traded funds (or ETFs) that invest in Germany like the iShares MSCI Germany ETF (EWG) and the iShares MSCI EAFE ETF (EFA). EFA invests in companies like Novartis AG (NVS), Toyota Motor Corp. (TM), and HSBC Holdings Plc (HSBC).
In many countries, the employment system’s flexibility or rigidity has also contributed to heterogeneity in the labor markets across the 18-nation Eurozone.
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