Income Support Systems, Labor Market Policiesand Labor Supply: The German Experience

In view of the demographic trends, most EU countries face the problem of a declining workforce in the future. Understanding the interaction between income support systems (such asunemployment benefits, social assistance, early retirement and pension systems) and totallabor supply is of crucial importance to combat problems and ensure economic growth in thefuture. The German labor market has been plagued by high and persistent unemployment inthe last two decades in combination with a relatively low labor force participation of women.This created a situation where labor market reforms were unavoidable. The speed and depthof the reforms are remarkable, mainly aimed at activating people by increasing theirincentives to take up work. The aim of this paper is to give a brief overview of the Germanincome support systems and labor market polices, their recent reforms and – where alreadypossible – effects of these reforms. Overall, Germany seems to be on the right track. Therecent reforms helped to tackle some labor market problems but also created high politicalunrest. It remains to be seen how future governments react to worsened economic conditionsin light of these experiences....