Offshoring and labour market reforms in Germany: Assessment and policy implications ☆ Thomas Beissinger a , Nathalie Chusseau b , Joël Hellier c, ⁎ ,1 a University of Hohenheim, Schloss, Museumsfluegel, 70593 Stuttgart, Germany, and IZA, Bonn, Germany b LEM-CNRS (UMR 9221), Université de Lille, Cité Scientifique, 59655 Villeneuve d'Ascq Cedex, France c LEM-CNRS (UMR 9221), Université de Lille, and LEMNA, Université de Nantes. IEMN, Chemin de la Censive du Tertre, 44300 Nantes, France abstract article info Article history: Accepted 2 December 2015 Available online 7 January 2016 Starting from the diagnosis that Germany has had better economic outcomes than most advanced countries since the mid-2000s, we propose a general equilibrium model to answer the following two questions: Why is it so and is the German experience applicable to other EU countries? Whereas a large number of observers explain Ger- man competitiveness by the labour market reforms implemented from 2003 to 2005 (Hartz laws), we suggest that (i) the gains in competitiveness are essentially due to offshoring and (ii) the labour market reforms have subsequently reduced the offshoring-related unemployment by decreasing the reservation wage, creating there- by low skilled jobs in non-tradable services. These reforms have also reinforced inequality already generated by offshoring. In contrast with the traditional explanation based on the Hartz reforms, our model findings and sim- ulations fit well with the sequence of observed facts. This experience could be extended to other EU countries, but with higher cost and lower efficiency. Finally, as the reduction in unemployment is based on the extension of non-tradable services, we suggest alternative policies that reach the same goal without increasing inequality. © 2015 Elsevier B.V. All rights reserved. Keywords: Competitiveness Germany Labour market policy Offshoring Unemployment 1. Introduction We develop a simple general equilibrium model that combines offshoring and labour market reforms to explain the main characteris- tics of the German experience since the mid-nineties. We show that the German primary upsurge in both competitiveness and unemploy- ment is linked to offshoring. The labour market reforms that reduced the reservation wage subsequently lessened unemployment by creating jobs in non-tradable services. We finally assess the extension of this ex- perience to other European countries and we suggest alternative poli- cies that could reduce unemployment without increasing inequality. Since the mid-2000s, Germany has exhibited better economic re- sults than most advanced countries. Growth has been higher, unem- ployment has continuously diminished, budget deficits and public debt have decreased and are now significantly lower than that of other European countries. Above all, the German performance on external markets has been particularly beneficial since Germany has ac- cumulated substantial trade surpluses and maintained its international market share, in contrast with all advanced economies whose market shares have narrowed because of the increasing weight of emerging countries. Finally, unlike all advanced economies, the decrease in unem- ployment has been continuous since 2005, with almost no impact of the 2008 financial crisis on this reduction. The turning point occurred in the mid-2000s. In the late 1990s–early 2000s, Germany was considered as ‘the sick man’ in Europe (Economist, 2004), with low growth, high and increasing unemployment, budget deficits and public debt. Most German economic indicators began to im- prove in 2006, i.e., one year after the final setting of the Hartz reforms. Implemented from 2003 up to 2005, the four stages of the Hartz reforms aimed at lowering unemployment and increasing German competitive- ness by making labour more flexible and inciting unemployed workers to participate in the labour market. The coincidence of the German recovery with the implementation of the Hartz laws has led a large number of observers to explain the German success by the following sequence: the Hartz reforms have in- creased labour flexibility, reduced wages and boosted German compet- itiveness, resulting in both higher exports and higher production, and finally lower unemployment. A virtuous circle has then emerged in which higher exports, production and employment have lessened public deficit and debt, which prevented Germany from setting the Economic Modelling 53 (2016) 314–333 ☆ We wish to thank two anonymous referees, Etienne Lehmann and the participants in the workshop on National Institutions in a Globalized World (Lille University, December 2014) for their helpful comments and suggestions. ⁎ Corresponding author. E-mail addresses: beissinger@uni-hohenheim.de (T. Beissinger), Nathalie.Chusseau@univ-lille1.fr (N. Chusseau), joel.hellier@wanadoo.fr (J. Hellier). 1 Pers. address: 28 rue de Sévigné, 75004 Paris, France. http://dx.doi.org/10.1016/j.econmod.2015.12.007 0264-9993/© 2015 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Economic Modelling journal homepage: www.elsevier.com/locate/ecmod