Impossible Germany

The Eurozone has had famously high unemployment rates since the euro’s inception in 1999, and for most of that time Germany has been a key sufferer, with unemployment over 8%. Since the financial crisis broke in 2008, German economic policy has been mostly associated with austerity policies, which have predictably tended to worsen Europe’s employment situation. Yet Germany’s labor market appears to have been thriving over the past five years, with an enviable unemployment rate last month of 5.4%, second-lowest in the entire 27-country Eurozone. (Relatively tiny Austria has the lowest, 4.6%.)

eurozone-country-unemployment-rates

What accounts for the German labor market miracle? I’ve been pondering this for a while now.

First, is this miracle for real? In the US, for example, the official unemployment rate has lately been falling, yet the employment-to-population ratio has barely budged, largely because fewer people are entering the labor force (i.e., getting jobs or looking for jobs). Yet Germany’s labor force participation rate and employment-to-population ratio have been increasing. Has Germany suddenly changed its definitions of who is unemployed or not in the labor force? Apparently not, and it wouldn’t matter anyway, as these numbers are the International Labor Organization definitions of unemployment, the same as the US uses. Also, this is a fairly long-term pattern, back to 2005 (coincident with, though not necessarily caused by, Angela Merkel’s term as Chancellor following the 2005 elections).

On the other hand, perhaps Germany’s official count of the employed, like the US’s, includes a lot of part-time workers who want full-time work but cannot find it because of bad economic conditions. Indeed, The Telegraph reports:

nearly one-in-five German workers is in a tax-exempt mini-job, earning €450 a month or less. A government survey a few years ago found that nearly a third of mini-jobs workers were looking for a job with longer hours but were unable to find one.

Let’s do the math. <20% * <(1/3) = employment rate of 94.6%. Subtract 6% of 94.6%, and you’ve got 88.92%, or an unemployment rate of about 11%. This is roughly similar to the US situation, where counting involuntary part-time workers as unemployed would add 6.2 points to the unemployment rate. On the other hand, Germany’s “mini-jobs” are more a matter of government policy than their US counterparts. For more, see this Wall Street Journal article on mini-jobs, in which German experts call them dead-end jobs that provide no incentive for employers to move these workers to full-time or for the workers to give up their tax and welfare benefits for full-time work. Balance it out with this other Telegraph article that argues that mini-jobs are a helpful means of providing work.

All of this is quite different from the post I expected to write. I was going to mention how the euro’s recent weakness (for the past two years, it’s been down about 10-15% from its 2009 peak) helps Germany’s net exports. It does so both in the usual way and because Germany’s currency is surely cheaper under the euro than it would be if Germany were still on the Deutschmark. Crisis countries like Greece and Italy drag down the value of the euro, while whatever the high demand for German assets as financial safe havens does to raise the price of the euro is offset by reduced demand for other euro-country assets.

I was also going to mention Germany’s sluggish population growth and difficulty in attracting immigrants, which have caused the labor force to grow slowly. It’s easier to find jobs for a trickle of new labor force entrants than for a flood of them.

Finally, I was going to mention this 2011 National Bureau of Economic Research paper by Michael C. Burda and Jennifer Hunt, which finds the “German labor market miracle” to be real and attributes it to a hiring catch-up on the part of employers who were reluctant to hire early on in the 2000s expansion, “wage moderation” (unions accepting smaller pay increases, apparently), and “working time accounts,” seemingly similar to the “flex-time accounts” proposed by Chamber of Commerce Republicans, that allow employers to avoid paying overtime if the employee work week averages out to the standard amount. Note that the paper (or at least its abstract) does not mention “mini-jobs,” which may mean that mini-jobs are nothing new in Germany and that their use has not expanded much of late (I could not find anything much on the history of mini-jobs in my Googling).

All things considered, Germany’s labor market still looks a lot better than that of the rest of the Eurozone (except German-speaking Austria). I’d like to see a German equivalent of the comprehensive “U-6″ unemployment rate that the US reports every month. My guess is that it would be very high, much like that of the US, but still showing dramatic improvement since 2005. They’re doing something right over there, but it’s hard to tell just what.

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One Response to “Impossible Germany”

  1. Mark E. Says:

    Sounds like the mini-jobs help prop up the stats like part-time employment here. When is this economic crisis going to end. BTW, I would have gone with this song. :-)

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