The Fall and Rise of Unemployment in Germany: Is the Red-Green Government Responsible?

Abstract

This article investigates the causes of recent German labour market developments. Contrary to the claims of the German chancellor, the analysis shows that the principal factors responsible for the decline in joblessness between 1998 and 2000 were not government policies, but favourable demographic developments and a strong demand for exports. Many initial government actions actually made reducing unemployment more difficult. Later measures, however - in particular, the 2000 tax reform - should have a positive impact on the labour market in coming years, but they cannot have produced past improvements because they were enacted after unemployment had declined. Similarly, the recent softening in the labour market is not the result of government policy. The Schröder government will only permanently lower structural unemployment if it enacts reforms that reduce the relative cost of labour.