Activating Labor Market and Social Policies in Germany: From Status Protection to Basic Income Support

1 Introduction Although Germany has a long-standing reputation as a passive welfare state with elaborate schemes of status-protecting income replacement through social insurance in case of unemployment and a full-blown system of active labor market policies, all benefit systems had formal elements of activation and work requirement--but they had not been enforced systematically. In recent years, however, reforms of active and passive labor market policy were implemented in Germany in order to create a more activating labor market and social policy regime and awake dormant activation principles. Changing the system of unemployment insurance benefits and basic income support as well as the repertoire of active labor market policy instruments and making benefit receipt more conditional upon job search and acceptance of job offers was a major issue on the political agenda. This led to a system shift away from "Bismarckian" status-protecting benefits towards a more "Beveridgean" model of income support with strong activation requirements. In the realm of unemployment benefits the dominant regime is no longer a social insurance benefit but a means-tested flat-rat transfer. The reform of the benefit system also involved a major overhaul of the governance of labor market policy and has far-reaching implications for the logic of the German welfare state. All these reforms generated considerable public attention and interest from foreign observers. This article provides an indepth account of the institutional change, its practical implementation and midterm outcomes and assesses if the desired economic and societal objectives of activation could be achieved through the adopted reforms. 2 The Shift towards Activation The Legacy of a Conservative European Welfare State The German welfare state is typically depicted as the prime example of the conservative welfare regime, for which the preservation of social status is central (Esping-Andersen 1990). It has also been prominently characterized as a "frozen welfare state" highly resistant to change (Manow and Seils 2000). Facing a difficult economic environment since the mid-seventies, policy makers and social partners used active and passive labor market policies to reduce labor supply by taking "surplus labor" out of the labor market and shifting the unemployed to benefit schemes and active programs that were not effectively oriented towards swift reintegration into the labor market (Manow and Seils 2000). For some decades, active and passive labor market policies provided a "convenient" and "socially acceptable" way of subsidizing entrepreneurial adjustment to dynamic global markets and help stabilize competitiveness of manufacturing that was at the core of the German employment system (Streeck 1997) while at the same time facilitating a "social policy" approach to unemployment emphasizing income protection and "benevolent" treatment through active policies. Availability of rather generous insurance-based social benefits related to labor market status and skills in the tradition of a "Bismarckian" model helped limiting income inequality and wage dispersion. Rather than creating a flexible and more inclusive labor market, the institutional arrangement of the German labor market of the eighties and nineties was conducive to limiting low-wage employment and wage inequality. This model focusing skilled labor was also stabilized by rather restrictive labor market regulation (Estevez-Abe et al. 2001). Whereas this institutional pattern helped stabilize the core of the labor market, it also resulted in a strong segmentation of the labor market and high long-term unemployment. However, the German "high equality, low activity" equilibrium (Streeck 2001) resulted in an ever increasing burden of non-wage labor costs as a growing number of benefit recipients in the labor market directly translated into rising social security contributions and fiscal pressure on the state budget that was used to cover deficits in social insurance. …