You Can't Argue With Success  

Posted by Big Gav

The Business Spectator has a somewhat mystifying column arguing that Germany's economic model is flawed because it is so successful - The Flawed Giant Of Europe. The underlying cause of the unreasoning seems to be the cursed work ethic, equating unemployment with misery. This might be true if you can't afford a generous social welfare system - however the Germans can, as a result of their economic success - so the real objection here is basically a (demented) political one - which is what you'd expect from someone working for a conservative think tank I guess. If the worst a country has to worry about is that people might have to mow their own lawns, things are pretty good (unless your goal is to have plenty of poor people around to do your menial work for you I suppose)...

Although concerns over our own productivity are only natural, focusing on this measure alone is too narrow because it ignores labour cost and employment effects. A closer inspection of German productivity reveals that a nation’s high productivity can create an economy in which people find it hard to get their lawns mowed.

Germany’s productivity is as legendary as the ingenuity of its engineers. When the marketing executives at Audi AG realised they were being mistaken for an Italian car manufacturer, they were quick to use their domestic slogan Vorsprung durch Technik (advancement through technology) in international advertising campaigns.

The Audi catchphrase worked wonders in selling the company’s Germanness, but it describes more than just this single carmaker. It also sums up the business model of Germany Inc. No other country has based its economy on such a combination of high technology, extreme efficiency, and capital-intensive production. Unfortunately, this may have more to do with the country’s labour market and welfare state than with sophisticated German engineering.

The German language is productive indeed. It has forged a complicated word for this phenomenon: Entlassungsproduktivität Рthe productivity gains from lay-offs. Economists like Hans-Werner Sinn, president of the IFO research institute in Munich, have long argued that high labour costs are driving German companies to substitute capital for labour. This boosts labour productivity Рand unemployment.

For many decades, German trade unions had successfully pushed for higher wages, particularly for low-income groups. Germany’s welfare state also contributed to increasing work costs. It is financed by payroll taxes, which means that employers have to pay roughly 25 percent in taxes on top of their gross wages bill. Add to that a well-developed – and costly – system of worker co-determination, whereby employees are involved in the management of a company, and it is not difficult to understand why German companies have been focusing their efforts on increasing efficiency and labour productivity. If it is costly and difficult to employ a worker, companies naturally start exploring other options – such as a new machine that could do the job just as well.

The German Federal Statistical Office provides good data to illustrate this. Between 1991 and 2009 capital intensity per worker, that is the private capital employed per job, rose substantially. In constant prices, it went up from €212,000 to €298,000 within this period – a cumulated increase of over 40 percent. This is not a new development, however. According to research by IWG Bonn, Germany’s capital intensity per hour worked has been higher than in any other industrialised country, except Japan, since the mid-1960s. This is even more remarkable considering the fact that working hours in Germany are among the lowest in OECD countries.

Although Germany’s productivity record may sound enviable, it has come at a huge price. It has triggered an enormous sectoral change and created a legacy of lasting unemployment. Jobs were cut in labour intensive industries where production was shifted to low-cost countries, mainly in Eastern Europe and Asia. Thus, in industries such as microchips, car components and textiles, Germany has lost employment thanks to a shift to increased capital intensity.

What this long process has brought about is an economy that is at the same time extremely productive and yet not very conducive to job creation. Workers lacking the qualifications necessary to be employed in high-productivity jobs are often relegated to a life on benefits. The jobless rate among them is much higher than in most other industrialised countries.

Martin Wolf at the FT is also having a go at the Germans (along with the Chinese), coining a new name for the 2 massive exporters, "Chermany" - China and Germany unite to impose global deflation. His arguments about the long term unsustainability of trade imbalances between nations make more sense than the nonsense peddled above at least.


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