Reforming German labour market institutions: A dual path to flexibility

Abstract

Dualization is a recurrent concept in analysing the political economy of labour market reforms in European countries. While it helps to make sense of changes at the margin of labour markets, so far, it remains unclear whether there are repercussions for standard employees. The paper examines this question by assessing changes in the German labour market. We argue that the growing availability of non-standard work increases pressure on core workers to accept more flexibility. The study yields two results. First, labour market reforms were, indeed, targeted at outsiders and continued in small and sometimes contradictory steps. The direction of change was determined by the socio-economic problem pressure of the respective period, but independent of government composition. Second, while insiders objected to such marginal flexibilization in principle — once the reforms were in place — they reacted with wage moderation and other instruments, thus strengthening their competitiveness relative to flexible workers.