Germany: A False Model

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Martin Hart-Landsberg reports from the economic front


As growing numbers of countries face renewed austerity pressures, there is a tendency to explain the trend by searching for specific policy failures in each country rather than considering broader structural dynamics.  Key to the credibility of those who argue for a focus on national decisions is the existence of countries that people believe are performing well.  Thus, the argument goes, if only policy makers followed best practices their people wouldn’t find themselves in such a bad place.  Recently, German has become one of these model countries.
 Here is a typical framing of the German experience: 
    At a time when unemployment rates in France, Italy, the UK, and the US are stuck around 8%-9%, many are turning to the apparent miracle in the German labor market in search of lessons. In 2008–09, German GDP plummeted 6.6% from peak to trough, yet joblessness rose only 0.5 percentage points before resuming a downward trend, and employment fell only 0.5%. In August 2011, the standardized unemployment rate was about 6.5%, the lowest since the post-reunification boom of 20 years ago.
In other words, Germany seems to be doing things right. Despite suffering a deep decline it was actually enjoyed a lower unemployment rate. So, how did it do it?  Often cited are recent German policies which have increased labour market flexibility. But are these the best practices that should be adopted elsewhere?  One way to answer that question is to look at what have these changes have meant to German workers.  A Reuters report concluded:
    Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called “mini-jobs”.
    The number of full-time workers on low wages - sometimes defined as less than two thirds of middle income - rose by 13.5% to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labour Office.
    Jobs at temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector. . . .
    Data from the Organization for Economic Co-operation and Development shows low-wage employment accounts for 20% of full-time jobs in Germany compared to 8.0% in Italy and 13.5% in Greece.
    New categories of low-income, government-subsidized jobs - a concept being considered in Spain - have proven especially problematic. Some economists say they have backfired.
   They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere.

    Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts.
    One out of five jobs is a now a “mini-job”, earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.
    “Regular full-time jobs are being split up into mini-jobs,” said Holger Bonin of the Mannheim-based ZEW think tank.
    And there is little to stop employers paying “mini-jobbers” low hourly wages given they know the government will top them up and there is no legal minimum wage.
This development was far from accidental.  It was the result of policy changes implemented in the early 2000s by then Chancellor Gerhard Schroder.  In 2005, Schroeder proudly announced at the World Economic Forum in Davos, Switzerland, that “We have built up one of the best low wage sectors in Europe.”
The New York Times described the German employment miracle as follows: 
    But hidden behind the so-called German economic miracle is an underclass of low-paid employees whose incomes have benefited little from the country’s stability and in fact have shrunk in real terms over the last decade, according to recent data.
    And because of government policies intended to keep wages low to discourage outsourcing and encourage skills training, the incomes of these workers are not likely to rise anytime soon.
    That, in turn, means they are likely to continue to depend on government aid programs to make ends meet, costing taxpayers billions of euros a year.
    The paradox of a rising tide that does not lift all boats stems in part from the fact that Germany has no federally set minimum wage. But it also has its roots in recent German politics, which have favoured measures to keep unemployment low and win support from employers. . . .

    The Confederation of German Employers’ Associations says the introduction of a minimum wage would push up labour costs and lead to more unemployment. Jobs would simply move out of Germany and to Eastern Europe or Asia.
These new labour policies have not only taken a toll on German workers, they have also greatly contributed to the growing crisis in Europe.  The low wages and insecure employment conditions have both enabled German employers to boost exports and limited imports. Global Employment Trends 2012, an ILO report, highlights this connection.  According to an article summarizing its contents:
    “The rising competitiveness of German exporters has increasingly been identified as the structural cause underlying the recent difficulties in the Euro area,” the report said. Crisis countries had not been able to export enough of their goods to Germany as domestic demand there was not strong enough because of low wages.
    The ILO said German policies to keep down wages had created conditions for a prolonged slump in Europe as other nations on the continent increasingly saw only even harsher wage deflation as a solution to their lack of competitiveness.
    The body called on Germany to enact swift changes. “An end to a low-wage policy would create positive spillover effects to the rest of Europe and restore a more equitable income distribution,” it said in the study.
    The body called on Germany to enact swift changes. “An end to a low-wage policy would create positive spillover effects to the rest of Europe and restore a more equitable income distribution,” it said in the study.
Read the rest of Hart-Lansberg’s analysis