Offshoring and Labour Market Reforms in Germany: Assessment and Policy Implications

Abstract

Starting from the diagnosis that Germany has had better economic outcomes than most advanced countries since the mid-2000s, we propose a general equilibrium model to answer the following two questions: Why is it so and is the German experience applicable to other EU countries? Whereas a large number of observers explain German competitiveness by the labour market reforms implemented from 2003 to 2005 (Hartz laws), we suggest that (i) the gains in competitiveness are essentially due to offshoring and (ii) the labour market reforms have subsequently reduced the offshoring-related unemployment by decreasing the reservation wage, creating thereby low skilled jobs in non-tradable services. These reforms have also reinforced inequality already generated by offshoring. In contrast with the traditional explanation based on the Hartz reforms, our model findings and simulations fit well with the sequence of observed facts. This experience could be extended to other EU countries, but with higher cost and lower efficiency. Finally, as the reduction in unemployment is based on the extension of non-tradable services, we suggest alternative policies that reach the same goal without increasing inequality.

Keywords: Competitiveness, Germany, Labor market policy, Offshoring, Unemployment

JEL Classification: F16, H55, J31, J65