How Germany defeated unemployment

In 2004, Germany's unemployment was 9.7 percent, like America's is now. Six years after implementing conservative policies, German unemployment dropped to 6.8 percent.

Thomas Peter / Reuters
German Labour Minister Ursula von der Leyen delivers the December 2010 jobless figures during a news conference in Berlin, Jan. 4. Freezing temperatures and snow storms sent more construction workers to the unemployment line than usual, interrupting 17 straight months of declining joblessness stretching back to July 2009, she announced.

In 2003-05, German chancellor Gerhard Schröder implemented a free market reform agenda called "Agenda 2010" which included tax cuts, unemployment benefits cuts and less strict labor regulations.

What has happened since? Well, while most other countries have seen unemployment increase, German unemployment has dropped from 9.7% in 2004 to 6.8% in 2010 (annual averages). From having an unemployment rate significantly above the EU average, Germany's unemployment is now significantly below it.

What's more, the labor force has increased nearly 1% , despite the fact that Germany, like Japan, has seen its a decline in the overall population and an even greater decline in the working age population.

No numbers for the entire period can be found on the German statistics office web page, but extrapolating the 2003-06 period, it seems that the working age population is decreasing at a rate of 0.5% per year, implying a cumulative decline of 3% between 2004 and 2010, something which in turn means that the relative labor force participation is up by 4%.

Add to that the decline in unemployment, and the German employment to population rate is up by 7% between 2004 and 2010, a period when as mentioned above most other countries have seen a decline in the employment to population ratio.

While there are probably other factors involved too, the German experience is a vindication of "Agenda 2010" and supply-side policies in general.


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