For decades unemployment increased dramatically in times of recession but failed to revert to its original level in the recovery, a ratchet effect which led to a substratum of unemployed workers. This pattern was first interrupted in the boom years of 2006 to 2008 - partly due to the so-called Hartz Reforms.
The number of unemployed fell from 5m to under 3m. However, many of the long-term unemployed missed out on these labour market successes. These are people who often do not have the qualifications that are in demand or who have lost their skills in the course of their unemployment. In addition, simple jobs can easily be replaced by machines or transferred to countries with lower wage costs. Last but not least, the gap between what low-skilled workers can earn and the state subsidies to which they are entitled is usually very narrow. The incentive to take up employment can therefore be too low.
Legal regulation is a further obstacle to high employment. Compared with other countries the German market is highly regulated. For example, while the laws which protect employees from dismissal encourage employers to retain their employees in times of crisis, the same companies are correspondingly reluctant to recruit when times are good.