Germany’s Economic Anti-Miracle

The Financial Times suggests Germany is losing its edge as an economic powerhouse. The facts they give are a bit disconcerting.

Germany’s path to competitiveness: cutting the cost of labour. Make no mistake; that has been the basis of the nation’s export success in the past dozen years; and exports have been its sole consistent source of growth in that period. But low wages are not the basis on which a rich nation should compete.

… Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe. Average wages increased by more than inflation and productivity growth in the past year for the first time after more than a decade of stagnation.

…total gross fixed investment has fallen steadily in Germany, from 24 per cent to less than 18 per cent of gross domestic product, since 1991. The recent OECD Economic Survey of Germany states that German investment has been persistently well below the rate of the rest of the Group of Seven leading economies since 2001 (and not just because of the bubbles of the mid-2000s in the US and UK). … public infrastructure investment has been even more lacking.

The other way for a rich country to stay at the top of the value-added chain, and thus compete on productivity, is to invest in human capital – that is, to educate its workforce. In Canada, France, Japan, Poland, Spain, the UK and the US, the share of young workers with advanced education is at least 10 per cent higher than in Germany – in most of them, 20 per cent higher or more. Germany, moreover, is one of only two advanced economies in which the share of those aged 25-34 with higher-education qualifications is the same as, or smaller than, in preceding generations (the US is the other). …

… Growth in gross domestic product per hour worked is 25 per cent below the OECD average, whether one goes back to mid-1990s or looks at just the past decade – and whether or not one excludes the bubble years for the US and UK.

…The export obsession has distracted policy makers from recapitalising its banks, deregulating its service sector and incentivising the reallocation of capital away from old industries. Furthermore, public investment in infrastructure, education and technological development could help increase profitable private investment, which would lead to growth with higher wages.

But, hey, at least they have a positive trade balance (sigh).

[Hat tip: Will Truman]

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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4 Responses to Germany’s Economic Anti-Miracle

  1. lukas says:

    There are a few serious distortions in here.

    Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe.

    Germany is also one of the few (it might be the only one, I’d have to check) countries in western Europe without a national minimum wage and has one of the lowest rates of unemployment in Europe. It also absorbs a substantial influx of low-skilled migrants from Eastern Europe, and, increasingly, from Western European coutries with troubled economies such as Spain.

    In Canada, France, Japan, Poland, Spain, the UK and the US, the share of young workers with advanced education is at least 10 per cent higher than in Germany

    How does this statistic take account of Germany’s dual education system? Many vocations that one might study for at a university in other countries are classified as trades in Germany and are therefore taught through apprenticeship.

    All is not well in Germany, but the fact that conservative chancellor Merkel has just been reelected for a third term suggests that most Germans aren’t unhappy with the direction the country is taking.

  2. J@m3z Aitch says:

    Lukas,

    Good points. Thank you.

  3. trumwill says:

    Lukas touches on some of the affections I have for the German model. Matthew Yglesias thought it was strange that Germans seemed to be perfectly happy with the combination of low unemployment and lower wages. As though these two had nothing to do with one another. Which maybe it is coincidental! But I am a believer that there is a tradeoff and I sort of wish that we had a preference for wage reduction in replacement of layoffs.

    I worked for a software company that cut wages by 10%. People weren’t happy about it, but I have also been at places where 10% of the workforce was laid off. There was a world of difference between the environments and degree of unrest.

    It’s dollars and cents that the less you pay each employee, the more of them that you can hire. Of course, there are limits to this in that some companies will pay the employees less and pocket the extra money. But the lower the pay bar, the easier it is to hire the extra people that you need, the easier it is to be price-competitive, and so on. There’s no specific right path here, but there are tradeoffs. Not just in terms of setting a minimum wage, but in how pay is defined overall.

  4. Troublesome Frog says:

    I worked for a software company that cut wages by 10%. People weren’t happy about it, but I have also been at places where 10% of the workforce was laid off. There was a world of difference between the environments and degree of unrest.

    Unless the entire market was reducing wages by roughly 10%, I’d expect your most skilled/marketable employees to jump ship as soon as possible after a 10% wage reduction. Shaking the tree inevitably leaves you with only the emplooyees who can’t get jobs somewhere else. Given the choice between choosing who to get rid of and losing employees by attrition, I’m always surprised at how many software companies choose to give up control and let the chips fall where they may.

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