German labour market shows signs of recovery

In April 2006, the Association of German Economic Research Institutes published its semi-annual economic report, which stated that the German economy was beginning to recover. Due to the economic upturn, German unemployment rates dropped slightly in the spring of 2006. Meanwhile, the German federal government and the social partners have engaged in heated debates about whether or not the introduction of statutory minimum wages is an appropriate measure to reintegrate low-skilled unemployed people back into the German labour market.

Background

On 26 April 2006, the Association of German Economic Research Institutes (Arbeitsgemeinschaft deutscher wirtschaftswissenschaftlicher Forschungsinstitute e.V., ARGE) published its semi-annual economic report (in German, 591Kb PDF), which stated that Germany was experiencing an economic upturn since the beginning of 2006. According to the report, forecasts predict an increase of German gross domestic product (GDP) by 1.8% in 2006 and 1.2% in 2007. Germany’s economic recovery is expected to ease some of the problems that are currently affecting the country’s labour market. The number of unemployed people is expected to decrease from 4,580,000 persons (10.6%) in 2006 to 4,440,000 (10.2%) in 2007. On 11 May 2006, the German Federal Statistical Office (Statistisches Bundesamt Deutschland, Destatis) confirmed in a statement to the press (in German) that the country’s GDP increased by 0.4% in the first quarter of 2006 compared with the last quarter in 2005. According to Destatis, rising private consumption expenditure and higher gross fixed capital formation have led to the economic upturn. The Cologne Institute for Economic Research (Institut der deutschen Wirtschaft Köln, IW) estimated in its spring forecast (in German, 171Kb PDF) that the labour force would increase by 240,000 people in 2006.

Lowering the unemployment rate

According to the most recent monthly report on the German labour market (in German, 1.6Mb PDF) of the Federal Employment Agency (Bundesagentur für Arbeit, BA), the number of unemployed persons dropped slightly from 5,010,487 in January 2006 to 4,790,046 in April 2006. Although the economic upturn has led to a lower unemployment rate, further structural reforms are deemed necessary by the federal government if unemployment is to be more substantially reduced. The government’s Annual Economic Report 2006 (1.1Mb PDF), Reforming, investing, shaping the future – Policy for more employment in Germany, highlights that approximately two million people or 39% of unemployed persons either have low skills or are unskilled; these people are only expected to find employment in low-pay sectors. Therefore, the federal government is placing this topic high on its political agenda.

Two problems must be overcome if less-qualified workers are to be reintegrated into the labour force. First, more jobs have to be created in low-pay sectors. Secondly, according to the German Constitution (Verfassung), the German state needs to guarantee the dignity of its people, ensuring that all citizens receive an income enabling them to live above the poverty line. Controversy has arisen between the coalition partners as to which instruments are appropriate to address these issues; for example, instruments which would secure such a minimum income, but which would not risk future economic growth. The federal government is currently reviewing different wage policies: these range from a benefit scheme that would ‘top up’ wages to collectively agreed or statutory minimum wages. On 8 May 2006, the federal Minister of Labour and Social Affairs, Franz Münteferring of the Social Democratic Party (SPD), argued in an interview with the Süddeutsche Zeitung that ‘wages ranging from €3.50 to €4.00 per hour were immoral’.

Reactions of unions and employers

On 27 April 2006, the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB) stated in a press release (in German) ‘that the pick-up in business activity as forecasted by the ARGE’s spring report should not to be overrated.’ In a discussion paper on minimum wages (in German), the DGB further argues that government reforms of the public welfare system, the enlargement of the European Union – which, it contends, has led to wage dumping by eastern European companies – and the unreasonable pressure exerted by German employers on wages will all make the implementation of minimum wages necessary. In a press release on 7 March 2006 (in German, 25.3Kb PDF), the United Services Union (Vereinigte Dienstleistungsgewerkschaft, ver.di) called for the implementation of statutory minimum wages across all industrial sectors. Ver.di proposed that the hourly minimum wage should start at €7.50 and that it should gradually increase to €9.00.

In addition, on 27 April 2006, Dieter Hundt, Chair of the Confederation of German Employers’ Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA), stated in a press release (in German) that ARGE’s economic forecasts point to positive economic development; however, further essential reform steps are necessary to promote growth in the German economy. He argued that the gap between labour costs and net wages needs to be reduced. With regard to the public discussion of, and calls for, minimum wages, Mr Hundt stated in the March BDA newsletter (in German, 92.2Kb PDF) that ‘the introduction of a statutory minimum wage would be an aberration that would have fatal consequences’. In an article (in German) emphasising structural reforms to increase employment rates, BDA suggests that any kind of a minimum wage system would, in particular, lead to a deterioration in the employment opportunities of less-qualified workers and to an exacerbation of the situation in the eastern German labour market.

Sandra Vogel, Cologne Institute for Economic Research (IW)

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