Did the German Model Survive the Labor Market Reforms?

Abstract

This paper discusses the specific features of the German model as a specific variety of capitalism that is distinct from the Anglo-Saxon model because it builds more on social security and social partnership. It argues that the German model has experienced increasing pressure due to growth in systemic unemployment since the mid-1970s. The situation worsened as a result of the financial distress experienced after re-unification. Therefore, although painful for some groups of workers, the labor market reforms implemented from 2003 to 2005 were necessary to keep the German model alive. I argue that a certain erosion of the German model resulting from less collective bargaining coverage, labor market segmentation and higher wage inequality has falsely been attributed to the reforms. Rather, these phenomena are caused by long-run trends that were already occurring in the 1990s or even earlier. The German economy successfully passed the stress test of the Great Recession and is exhibiting ongoing employment growth. Basic features of the German model such as long tenures for qualified prime-age workers or the dual training system remain essentially intact. Hence, the German model is not dead, but vitally alive. However, some prudent counter-measures need to be implemented to fight against creeping erosion from segmentation and inequality. These should be taken with a sense of proportion in order to not jeopardize the great employment-related successes of the reform.