Abstract: This paper looks at the institutional structure of the German labor market and analyzes why Germany’s present set-up produces unemployment. A high reservation wage, i.e. the wage that unemployed people are prepared to work for, determined by the level of government support, has dried up the lower segment of the labor market. Social security contributions represent a tax on labor and provide an incentive for firms to reduce jobs. In addition, the wage policy of the trade unions has overtaken full employment productivity growth. The paper also describes and evaluates the reforms undertaken in Germany to deal with these causes of unemployment.
International Journal of Comparative Labour Law and Industrial Relations