The Real Secret to Germany’s Success: Don’t Give the Workers Any Raises

RUESSELSHEIM, GERMANY - SEPTEMBER 22: Thomas Sedran, current head of Opel, tours the Opel Insignia and Astra factory during a celebration marking Opel’s 150th anniversary on September 22, 2012 in Ruesselsheim, Germany.

Photo by Sean Gallup/Getty Images

Jack Ewing has a sort of curious article in the N.Y. Times about the low unemployment rate in Germany that focused heavily on the labor market reforms enacted by the Schröder government. I’m not a huge fan of the insider-outsider labor market regulations that are common in Western European countries, but as an actual policy explanation for recent job market trends this is badly undermined by this graf lurking near the end of the piece:

Despite the 2005 overhaul, most German workers continue to enjoy far more protections than those in the United States. Permanent workers can usually be laid off only after lengthy negotiations with employers that typically include hefty severance payments. German politicians remain reluctant to tamper with these legal barriers to dismissal.

The U.S. unemployment rate is substantially higher than the German unemployment rate but quite a bit lower than the Spain/Italy/Portugal unemployment rate. Yet in terms of labor market regulations it’s Germany who’s in the middle, not the United States. The real secret to Germany’s job market success, though perhaps in some ways related to the labor market regulations, seems to be simpler—don’t give the workers any raises:

Now you look at this and you can see why Germans aren’t chomping at the bit to offer bailouts to their southern cousins. But by the same token, you can see why the rest of Europe isn’t rushing to embrace this model. The pitch for more flexible labor markets is supposed to be that you’ll earn higher wages if employers have more freedom to organize work relationships to maximize productivity. Less job security and lower pay is not a great slogan. It is, however, a huge exporting success story. Germany has completely reoriented its political economy around the needs of its export industries which is nice except that just like in all other rich countries the majority of Germans work in non-tradable services.