The productivity effects of labor market deregulation: evidence from German firms during 2010-2019

In the early 2000s, the German government introduced the Hartz reforms, which deregulated German labor markets. These reforms were praised internationally as striking a balance between job growth and productivity growth. While macroeconomic research has shown that the reforms have indeed lowered German unemployment, their effects on labor productivity need to be better understood. This paper addresses the impact of temporary agency work (TAW) on German labor productivity during 2010-2019, based on data from a firm-level panel of the German Institute for Employment Research (IAB). It contributes to the rising number of firm-level studies by extending their results in a broader temporal perspective, during which TAW intensities have increased substantially, especially in TAW-using firms. The system generalized method of moment (GMM) estimations based on a firm-level data set with 13,197 observations for the period 2010-2019 show that a robust hump-shaped relationship exists between the extent of TAW and the firms' labor productivity. We find that the increase in the use of TAWs following the Hartz reforms has, on average, positively contributed to labor productivity growth in German firms. However, the findings also show that if numerical flexibility is increased too much, productivity growth in Germany will suffer. This is particularly the case for several industrial sectors that are important in the German economy. These results are important given recent calls for more labor market flexibility to help firms grow in an increasingly turbulent global economy.