The German Labour Miracle

Sadly we’ve yet another piece in the UK press looking at the German labour market and assuming that we should copy some or other part of it. The sadly part comes from the way that no one ever recommends the thing that actually contributed to that miracle: mainly because the English unions and workers simply would not acept what the Germans enthusiastically embraced.

In the battle between rival systems, “Rhineland capitalism” appears to be winning hands down. In the two years since the global economic downturn in 2009, Germany has expanded employment by 1.8m, while the UK, US, France, Italy and Spain have shed 7m jobs. In 2007, when most other countries were nearing the end of a boom driven by excess credit, Germany had the highest unemployment rate (8.7% of the workforce on a harmonised basis) of the group of seven leading industrialised countries. Yet in late 2011, according to OECD figures, German unemployment, at 5.2%, was the lowest in the G7 apart from Japan.

Oh, yes, lovely. The rest of the argument is that because Germany has apprenticeships and work sharing then these two things will bring down the unemployment rate elsewhere.

But here’s the problem. Germany had apprenticeships and work sharing when the German unemployment rate was much higher than everyone else’s too. So it can’t be those two things alone that explain the current low unemployment rates. This is really a case of people seeing only what they’re looking for.

What has changed over the last decade in the German labour market is that workers’ wages have deliberately been kept down. Around the turn of the century the Germans, in that rather Germanic manner, had a good hard look at what was causing high unemployment. The answer was that German labour was becoming uncompetitively expensive. The unit labour costs that is, the amount that had to be paid for labour relative to the value of the goods produced with it.

So, there was pretty much a national compact. The increases in productivity in the coming years (because, technology) would not be passed on in pay packets. Instead nominal wages would rise a bit, real wages only a little and unit labour costs would then fall to more internationally competitive levels. Which is what has happened.

So, the great secret of the German labour miracle is simply that they’ve, over the last deade, lowered labours’ wages in relative terms. And yes, that really does lead to a lower unemployment rate. There is in fact no great secret: except, of course, for the fact that no one in the US or US is willing to suggest this clearly and obviously workable solution.

And yes, I do wonder why.