TUAC - TRADE UNION ADVISORY COMMITTEE TO THE OECD

19/02/2014

The recent German economic and employment performance are perceived by many economists and policymakers as a best-practice example of a successful labour market and financial consolidation reforms. When the German Chancellor, Angela Merkel, addresses OECD Ambassadors and leading representatives of the organisation, it is most likely that she will be conveying a similar message.
However, a closer look at the German economic and labour market performance reveals that the perception of an “employment miracle” does not capture the reality of the German labour market.

A characteristic feature of the current labour market in Germany is the ongoing increase of non-standard and often precarious working arrangements, accompanied by a growing share of low-wage employment - forcing the current German coalition government to agree on the implementation of a minimum wage.

Moreover, it is important to note that the fact, that Germany experienced almost no increase in unemployment during the financial and Euro crisis is not due to labour market reforms implemented in the mid-2000s, the so-called “Hartz reforms”. A new study on ‘ From the sick man of Europe to an economic superstar: Germany’s resurgent Economy” published in the Journal of Economic Perspectives, argues that neither the labour market reforms nor the integration into the Eurozone played a decisive role for the transformation of the German economy.

Instead, the study provides evidence that the specific governance structure of the German labour market institutions allowed them to react flexibly in a time of extraordinary economic pressures, and that these distinctive characteristics of its labour market institutions have been decisive for its economic success over the last decade.

The specific feature of the German system of industrial relations that the study emphasizes is that they are laid out in contracts and mutual agreements between the three main actors in Germany: employer associations, trade unions, and works councils. The institutional set-up of this system remains basically unchanged.

The study also points out that the German reunification and the EU enlargement contributed to a weakening of unions in Germany. Whereas the fall of the Berlin Wall in 1989 and the dramatic cost of reunification burdened the German economy led to a prolonged period of dismal macroeconomic performance, the EU enlargement gave German employers access to neighbouring East European countries that were characterized by low labour costs, yet stable institutions and political structures. These factors changed the power equilibrium between employer and employee associations and forced the latter to respond in a far more flexible way than many would ever have expected.

However, it remains questionable whether the study provides a sufficient explanation of the recent German labour market performance. In particular, it would be misleading to conclude that

• Employment can be increased when wages are lowered and that high unemployment prior to the crisis in Germany was due to too high wages;
• Export performance should be taken as the ultimate goal of economic success; such perspective would disregard important factors within and beyond the GDP;
• and disregard aggregate demand and the effects of wages on aggregate demand as well as the effect of aggregate demand on unemployment.