The basic characteristics of the traditional German labour market model can be summarized as follows: a \u2018dual apprenticeship\u2019 system combining part-time education at a vocational college with on-the-job-training; relatively strong job protection, particularly with respect to individual redundancies; a high coverage of collective bargaining, especially in the western part of Germany; the strong role of social partnership and workers’ codetermination; a strong and predominantly contribution-financed social security net, including relatively generous benefits for the long-term unemployed (high replacement rate plus long entitlement period); and the dominance of the \u2018male bread-winner model\u2019 (for example, tax splitting between spouses).<\/p>\n
These factors go in hand with certain outcomes, which are characteristic of the German economy: the importance of human capital specific to a particular company; the strong role played by the manufacturing sector; a low level of industrial conflict; high social security contributions; fairly low external flexibility (high protection against dismissal); comparatively high internal (inner-company) flexibility; and relatively low wage dispersion compared to other countries.<\/p>\n
Following the fall of the Iron Curtain \u2013 and in combination with a rapidly rising financial burden due to German reunification and increased competition from low-wage countries \u2013 these structures contributed to a significant deterioration of the labour market during the 1990s. Low economic growth, combined with low rates of job creation, led to a rapidly rising level of structural unemployment, particularly in eastern Germany.\u00a0In 2005, unemployment reached a peak of nearly five million people.<\/p>\n
Between 2003 and 2005, and in response to the increasingly gloomy labour-market outlook, the “Red-Green” government under Chancellor Gerhard Schr\u00f6der implemented a fundamental reform of the German labour market, known as the \u2018Hartz reforms\u2019. The central idea was to increase the flexibility of employment and to encourage \u2013 or activate \u2013 the unemployed to find employment. Key elements of the reform package included:<\/p>\n
Since the middle of the 2000s, the labour market has improved dramatically: unemployment in Germany sank from 5 to under 3 million. It thus became possible to reduce long-term unemployment and to increase the employment level significantly \u2013 in sharp contrast to other OECD countries (see figure).
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