Is it better to use carrots or sticks to get people back into work? For the past 25 years or so, a lot of countries have gone big on the latter. Germany’s Hartz IV reforms in the mid-2000s, which chivvied the unemployed to look for work and imposed financial penalties on people who refused job offers, are perhaps the most famous example. Although economists still debate their effect, unemployment plunged over the following decade and Germany shed its label as the “sick man of Europe”.
Now Germany wants to change tack. In January, Chancellor Olaf Scholz’s coalition of Social Democrats, Greens and liberal Free Democrats replaced Hartz with the “Bürgergeld” or citizen’s income, which promises to be less punitive and more supportive of the unemployed. “We do not want to place recipients of benefits into just any job as quickly as possible any longer,” the labour ministry has explained. “The focus is now on initial and further training, offering long-term prospects for job seekers.” As well as higher benefit rates (up from €449 to €502 for a single adult) and more vocational training, the coalition had initially wanted to bring in a six-month “trust period” in which jobseekers would not face sanctions.
There is an economic rationale for changing course, says Andrew Watt, an economist at the Institut für Makroökonomie und Konjunkturforschung. With very high unemployment, there’s a big incentive “just to get people into jobs, but once unemployment is down, the necessity of forcing people to take any job goes down, and then from a business point of view and a government point of view, you get more interested in, ‘Are people in high productivity jobs, jobs that are good for their health, jobs where they can stay past 65?’”
A tough sanctions regime can be counterproductive to these goals. As a review of 94 studies on the effectiveness of sanctions from a range of countries concludes: “While sanctions tend to increase exits to employment in the short term, there is evidence of adverse impacts on job quality, job stability, earnings and income, and of increased exits to non-employment or inactivity”.
In Germany, Hartz has been blamed for helping to expand low-paid work. In the UK, a study published last month by the Institute for Fiscal Studies found a succession of benefit reforms in recent decades led to higher employment but usually in part-time, low-paid jobs with little career progression. As a result, those who entered work tended to pay little tax and still required in-work benefits to top up their incomes. After a push between 2008 and 2012 to get more single parents to work, for example, the average earnings of those newly employed were just £8,000 a year.
Employers don’t particularly like systems that force people to bash out countless job applications either. “We stopped advertising on the Jobcentre . . . because you just had hundreds and hundreds of applications from people that are really not interested in care,” one UK employer told researchers at Manchester Metropolitan University in a recently published study. “They just have to apply to show their employment adviser that they’re applying for jobs.”
Similarly to Germany, the UK doesn’t have an unemployment problem but it does suffer from labour and skills shortages. In fact, the UK situation is more worrying because rising numbers of people are dropping out of the labour market altogether into long-term sickness or early retirement. The Conservative government has announced some “carrot” policies that should help, most notably by offering more hours of free childcare to parents who work. It also plans to stop putting people through a test of whether they are too ill to work, allowing them to seek work without fear of losing benefits.
But the sticks are not disappearing just yet. The German reforms were watered down at the last minute when the ruling coalition had to compromise with the conservatives in the upper house. As a result, sanctions will be in place from day one.
The German sanctions are nowhere near as punitive as those in the UK, though. Chancellor Jeremy Hunt said in his Budget last week that “sanctions will be applied more rigorously to those who fail to meet strict work-search requirements or choose not to take up a reasonable job offer”. In future, it is possible that unwell and disabled people could be at risk of them, too.
Some people dream of a universal basic income where everyone gets money from the state with no strings attached. But there could be a long wait. Even when the macroeconomy is at a point where using sticks to prod people is probably doing more harm than good, they are proving remarkably hard to put down.
Source: Financial Times