German job miracle becomes ever harder to sustain

The country’s long-lasting labour market revolution is half-kaput. New jobs are still appearing at an amazing rate. But this is no longer translating into falling unemployment. And an ill-considered labour market re-regulation is poised to worsen the deep structural problems.

Germany’s labour market is simultaneously striding forward and stagnating. The apparent paradox springs from one positive trend, migrants and women joining the labour force; and two deep-rooted structural problems, a skills mismatch and regional inflexibility. Unfortunately, the government has embarked on a re-regulation of the labour market that is likely to worsen the problems.

Since 2005, Germany has seen an outright labour-market miracle. The number of people with jobs has risen by 4 million, or 11 percent. The quantity of GDP growth needed for net job creation has dropped in half, to just 1 percent.

The jobs are still coming. In December the national unemployment rate stood at 5.1 percent, by the standard international measure – less than half the 12 percent of the whole euro zone. However, the number of jobless people did not shrink in 2012. It rose last year by 50,000, to 2.95 million. Think tank IMK expects simultaneous rises in employment and unemployment in 2014.

One issue is that the labour-market reforms which cut unemployment may have run their course. Changes in job centres and benefits have shortened the average duration of unemployment spells as much as possible.

That leaves a distressingly large group of people who are very difficult to employ. Despite Germany’s widely hailed vocational training system, many workers lack appropriate qualifications.

Then there are regional imbalances. There is effectively full employment in the south and southwest, while the east and parts of the northwest suffer from double-digit unemployment rates.

Rather than tackling these labour-market faults, the government of Angela Merkel is trying to fight perceived social wrongs. A crackdown on temporary contracts and subcontracted work may dampen flexibility.

In addition, increased pension benefits for mothers and low-wage workers as well as new incentives for early retirement will depress job creation by adding to non-wage labour costs. And a national minimum wage of 8.50 euros looks too high for the low-productivity east. On top comes falling labour costs in countries in the euro zone periphery.

Germany’s labour-market miracle is already half-kaput. The country cannot afford to stress the half that is still working.

This article was initially  published as a Reuters Breakingviews comment on 3 February  2014.


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