In many past commentaries I attacked labor markets in Western Europe as being too rigid regarding layoffs and hires, and for providing too generous unemployment compensation often for very extended periods. That rigidity explained why unemployment rates in the 1990s and the first 6-7 years of this decade were much higher there than in the United States. Responding to the facts of high unemployment and long durations of unemployment, and to criticisms of their labor market policies voiced by economists, many countries of Western Europe began to reform their labor market policies to make them more flexible, and to limit the duration of government support of unemployed workers.
The case of Germany is one of the most interesting, only partly because Germany is the largest economy of Europe. Under the long reign by the conservative Christian Democratic Union, little was done to reform the German labor market. In a reminder again of the “Nixon going to China” doctrine, the socialistic Social Democrats, led by Gerhard Schroder, introduced various labor market reforms in 2003 after being elected to power in 1998. He cut the length of the period of eligibility for unemployment compensation, extended the age of retirement and reduced retirement pensions, and made it a little easier for companies to layoff workers. In good part as a result of these policies, while Germany unemployment had been close to 10%, it fell to 7.5% prior to the onset of the recession, perhaps mainly due to these reforms.