Making Labor Market Reforms Work for Everyone: Lessons from Germany

by Jacob Funk Kirkegaard, Peterson Institute for International Economics

January 2014

Germany has the best functioning labor market among large economies in the West. In the eyes of some, however, its success comes with a price. Questions have been raised over whether Germany's labor reforms have lowered living standards, especially for low-income workers, worsening income inequality. Germany has also been accused of selfishly riding a wave of strong foreign demand for German exports. Kirkegaard shows that Germany's recent labor market success—its low unemployment rate, high labor participation rate, and increased productivity—has indeed resulted from the structural labor reforms in the early 2000s. But the expansion of low-wage "mini-jobs"—criticized for allegedly squeezing the low-wage workforce—largely results from their increasing use as second jobs, and labor market success can be achieved at no additional rise in inequality.

Data disclosure: The data underlying this analysis are available here [xlsx].

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