In our article of “The Effects of Reforming a Federal Employment Agency on Labor Demand” by Kornelius Kraft and Alexander Lammers, we examine how the Hartz III reform of Germany’s Federal Employment Agency (FEA) influenced employment growth at the establishment level. Our focus is on understanding the real-world impact of modernizing public employment services on firms’ hiring practices and labor demand.
In this paper we report the results of an empirical study on the employment growth effects of a policy intervention, explicitly aimed at increasing placement efficiency of the Federal Employment Agency in Germany. Find out more in our latest SFB 823 discussion paper No. 28/2019.
Abstract:
We use the Hartz III reform in the year 2004 as an exogenous intervention that improves the matching process and compare establishments that use the services of the Federal Employment Agency with establishments that do not use the placement services. Using detailed German establishment level data, our difference-in-differences estimates reveal an increase in employment growth among those firms that use the agency for their recruitment activities compared to non-user firms. After the Hartz III reform was in place, establishments using the agency grew roughly two percentage points faster in terms of employment relative to non-users and those establishments achieve an increase in the proportion of hires. We provide several robustness tests using for example inverse-probability weighting to additionally account for differences in observable characteristics. Our paper highlights the importance of the placement service on the labor demand side, in particular on the so far overlooked establishment level.
Background and Motivation
Germany’s labor market in the early 2000s was characterized by high unemployment and increasing calls for institutional reform. The Hartz reforms, introduced between 2003 and 2005, aimed to address these challenges. Hartz III, implemented in 2004, specifically restructured the FEA to make it more efficient, customer-oriented, and responsive to both job seekers and employers. The reform introduced case workers, improved advisory services, and sought to streamline the matching process between vacancies and candidates.
Research Approach
To assess the effects of Hartz III, we use data from the German IAB Establishment Panel spanning 2000 to 2008. We compare establishments that regularly used the FEA’s placement services (the treatment group) with those that did not (the control group). By applying a difference-in-differences estimation, we isolate the causal impact of the reform on employment growth and the proportion of new hires, controlling for macroeconomic factors and firm-specific characteristics.
Key Findings
Our analysis shows that the Hartz III reform had a clear and positive effect on establishments utilizing the FEA’s services. After the reform, these firms experienced employment growth rates about two percentage points higher than those not using the agency. The share of new hires also increased by roughly two percentage points for FEA users compared to non-users. These results are robust across different econometric models and remain significant even after adjusting for potential selection biases.
We interpret these findings as evidence that the improved efficiency and customer orientation of the FEA reduced recruitment costs, improved the quality of job matches, and ultimately supported higher productivity and job creation at the firm level. The absence of similar effects in the control group reinforces the conclusion that the observed employment gains are directly linked to the reform.
Broader Implications
Our study contributes to the understanding of labor market reforms by demonstrating that efficient public employment services can boost labor demand—not just reduce unemployment. The Hartz III experience suggests that targeted institutional reforms, particularly those that modernize and streamline public agencies, can have substantial positive effects on firms’ hiring behavior and overall employment growth. For policymakers, this highlights the value of investing in the modernization of public employment services to foster a more dynamic and responsive labor market.
Conclusion
In conclusion, our research provides strong evidence that the Hartz III reform of the Federal Employment Agency played a vital role in increasing employment growth among establishments that used its placement services. By making the matching process more efficient and responsive to employer needs, the reform not only helped reduce unemployment but also stimulated job creation at the firm level. This underscores the broader economic benefits of well-designed, targeted labor market policies.
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