In this article we study the institutional reform of the German labour market during the period 2003–2005, the so-called Hartz reforms. The aim of this paper is threefold. First, we describe the economic and institutional context of the German labour market before the Hartz reforms in light of general trends in market economies. The falling competitiveness of the German economy, the need to increase the flexibility and dynamics of the labor market have made the ruling elite to proceed with institutional transformations. Second, we analyze the theoretical concepts that became the basis for the labour market reform and examine the changes in the main labour market institutions. Finally, we evaluate the outcomes of the institutional reforms for economic activity, employment, unemployment and labour costs. Of major interest is the question about the impact of the Hartz reforms on internal flexibility.

In this work we rely on the institutional analysis. Results of the study contribute to the understanding of the mechanism of labour market transformations. At the same time its main conclusions can be used for improving the economic and social policy in the Russian Federation.

We came to the following conclusions. We have found the positive impact of the changes in labour market institutions on labour market outcomes: especially on the dynamics of economic activity and employment. The Hartz reforms fundamentally modified the functioning of the German labor market and increased both flexibility and job creation capacities. However, the pattern of German de-regulatory reforms accesses mostly the margins of the labour market, i.e. ‘outsiders’, that contribute to a growing dualisation of the employment system. This dualisation trend was reinforced by dynamics in industrial relations and company employment practices where we can observe growing reliance on mechanisms of internal flexibility for the skilled core work force and increasing use of non-standard types of employment in less specifically skilled occupations.