On February 25, 2002, the German chancellor, Gerhard Schröder, heading a coalition of the Social Democratic Party (SPD) with the Green Party (Greens), instituted what became known as the “Hartz Commission.” Charged with the organizational restructuring of the Federal Labor Office (Bundesanstalt für Arbeit), the commission presented its suggestions in August of the same year. These suggestions included several far-reaching labor market reforms, most importantly the merging of the unemployment and social assistance systems. Immediately before the federal election on September 22, 2002, Schröder announced his intention to implement the proposed reforms “one-by-one.” After a narrow win, the reelected red-green coalition initiated and eventually passed legislation to that effect. Of these so-called Hartz reforms, the merging of unemployment and social assistance was particularly consequential. For those unemployed for longer than 12 months – in Germany typically more than half of the unemployed (Duell and Vetter 2012, 2) – the reforms meant deep cuts in benefits. Arguably, the German labor market reforms are among the most significant examples of welfare state retrenchment in Western Europe.

How can we understand far-reaching structural reforms of a statist welfare state in a gridlocked political system known for its Reformstau (reform backlog)? How can we make sense of the fact that a left government initiated some of the deepest cuts in welfare state benefits in the post–World War II era? In other words, what explains the Hartz reforms? In this chapter, I apply my theoretical framework to make sense of the German experience.

From the perspective of my theoretical framework, German reunification can be understood as an exogenous shock, combining two risk pools (West and East Germany) into one, while maintaining the social policy arrangement of West Germany. This led to a sharp increase in risk inequality – the result of adding the high-unemployment Länders from the former East Germany to the existing West German social insurance system – and made risk pooling for a majority of West Germans much more expensive and a lot less attractive, and it eroded support for generous unemployment benefits. Risk pool and benefit generosity were out of equilibrium.