One important concept of the Germany government is the so called "Hartz IV reform" which was developed in 2005 order to reduce the serious problem of unemployment.
In this essay I want to analyse the effectiveness of the Hartz IV reform on the situation with unemployment in Germany using the Neoclassical and Keynesian view.
Germany's social market economy characterized by Ludwig Ehrhard with the slogan "Prosperity for All" [2] proved to be very successful and led Germany to an economic miracle in the post-war era.
However, in the course of the German reunification in Oct.1990 unemployment started to increase and reached its peak at more than 12% in 2005 [3] . (app)
In the same year the IV reform came into effect, which is an act by the Social Democratic Party of Germany. Nowadays, there are about 6,7 million people dependent on this essential welfare concept [4] .
The aim of Hartz IV is based on the major principle of a welfare state like Germany. Goal is to encourage readiness for work and labour productivity but also provide equality of opportunities and reintegration of unemployed and long-term jobless person. [5]
This new reform completely restructured the labour market through creating more mini-jobs (400euro per month), Job Centers which are facilities for providing personal advices, assistance and other helpful services for unemployed and the introducing of a so called "Ich AG" to motivated jobless become self-employed person through state benefits.
The benefit payment for a single adult is currently 359 Euro plus rent payment for an appropriate housing [6] .
Facing the problem of unemployment, on the labour market in Germany, from a neoclassical point of view, there is no way to reach equilibrium naturally in the long run, because the conditions are not given.
First of all, there is no perfect competition on the labour market.
This assumption is based on three facts. Due to globalization there are a high number of interregional migrations, who often works for lower wages. Especially in Germany, we also see the phenomenon of intraregional migration (e.g. East to West), because the degree of urbanization is significantly stronger then the words average [7] , which also can lead to differences in payments according to the Harris-Todaro model [8] . The third argument refers to the theory of Reinberg and Hummel, which analysis the wage differentials of different skill types (app). Therefore it is obvious that insufficiently qualified workers easier become unemployed then skilled one [9] .
Furthermore the requirement of flexible wage is not given on the labour market in Germany. For every branch there is a fixed minimum wage, and the unions will not necessarily accept lower wages in order to reach equilibrium. [10]
Another inconsistency is that voluntary unemployed persons exist shown on the following (app)
For instance, the minimum wage is 10 Euro. That would extent supply to Q2 and contract demand to Q1. Now, there are low skilled worker able to work for 8 Euros/h. This would create a new equilibrium and at the same time discouragement (Q1--- Q2) for the skilled to work.
In this context, I would like to mention another reason for voluntary unemployment caused by Hartz IV. Referring to a WELT newspaper article, many low-income earner are questioning their effort to work, because through Hartz IV they will get the same amount of money or even more than working an 8 hour.
According to the neoclassical theory, the German welfare state causes their own problem of unemployment through government intervention by creating legal minimum wages and introducing benefits like Hartz IV for unemployed. In order to reduce unemployment, the state must abolish minimum wages, social security benefits and power of trade union. In this way, the labour market will reach equilibrium in the long run. [11] These measures however, would completely contradict the German constitution as a social state.
The economic policy of Germany would rather fit, if we analyse the problem of unemployment and Hartz IV from a Keynesian view.
Keynesians are calling for a strong politico-economic state. The government should take control of the economy and eliminate market disturbances in order to provide balance of the labour market. To Keynes, labour demand and supply will only meet by chance, because there are many factors influencing the labour market. [12] This theory more likely applies to Germany's situation and the introduction of the Hartz IV reform as a significant state intervention.
The reason why unemployment happens lies on the demand side of labour, which is caused by falling aggregate demand. [13] In (app,app) we can compare the development of unemployment to the development of consumption in Germany. A clear example to highlight the just mentioned relationship between unemployment and aggregate demand would be the end of 2006. The result of a high consumption rate in 2006, lead to a downfall of unemployment in 2007.
Keynes did believe, that in the long run the labour market may correct itself. However he doubts it with the quote: "In the long run we are all dead" (Tract, p. 83).
Another important theory illustrates the trade-off relationship between unemployment and inflation through the so called "Phillips curve". In 2008 there was a high inflation rate in Germany and at the same time low unemployment.(app)
In this context, Keynes mentioned that economic or monetary policy like the Hartz IV reform has a long term influence on employment but no a direct influence on inflation. Inflation is just illustrated as the core inflation. [14]
After introducing the Hartz IV reform, the unemployment rate in Germany was clearly decreased.
Questionable is, if this downfall was caused by Hartz IV or just due to the worldwide economic boom. Another aspect to consider is the definition of employment. According to the ILO, 1-Euro Jobs or Mini Jobs (max. 400Euro/month) included as employment as well [15] . In (app) we can see that the amount of part-time and mini jobs is increasing but full-time jobs were decreased. Still this fact can lead to an increase of employment.
Critics say that Hartz IV is counterproductive, as it creates many voluntary unemployment and costs for social benefits has almost doubled since its establishment. [16]
Fact is that the achievement through Hartz IV is by far not clear enough then the government expected 5 years ago.
