on overall employment performance. Malfunctioning could be identified for several specific
labour
market segments, the most problematic areas being:
•
wages for the low skilled. The wage bargaining process in Germany favours uniform wage
developments within, and to some extent also across industries. Workers’ differences in
skills and labour productivity are typically not taken into account in sectoral collective
agreements that do not differentiate according to occupational groups and that – overall
wage moderation notwithstanding – have a tendency towards raising low wages more
strongly than average wages. The compression of the German wage structure is thereby
maintained. The result is a share of low-skilled workers in unemployment that is far above
their share in active population and that is high in a cross-country comparison. More
(downward) flexibility has been introduced in collective agreements over the last years, but
the use of these possibilities is not yet very widespread.
•
reservation wages, in particular at low wage levels.
Although replacement rates are, overall,
not particularly high in comparison to other Member States, incentives to accept a job offer
are weak or non-existent for specific groups of the labour force. The still high level of
taxation and linear social security contributions combines with long benefit duration and
high rates of benefit withdrawal to significant unemployment traps.
•
lack of wage differentiation and mobility. Unit labour costs had exploded in East Germany
in the early years after re-unification. The necessary adjustment is hampered by the rigidity
of the relative East-west collectively agreed wages. Even
the facts that meanwhile the
coverage of collective agreements in East Germany is far below West level and that opening
clauses exist within collective agreements have not yet brought about the adjustments that
would be necessary in order to move on from employment stagnation to renewed
employment growth. Wage differentiation and geographical mobility would be expected to
be to some extent substitutes when it comes to re-balancing regional labour markets. Yet,
mobility is far too low to reduce the large regional unemployment disparity.
Although probably less pressing immediately, two additional issues carry the potential of
seriously hampering future
employment dynamics, in particular against the backdrop of a
shrinking working age population:
•
Several impediments for female participation in the labour market have been identified. The
tax-benefit system discourages work of second earners in a couple. It is hard to combine
(full-time) work and family, due to the lack of childcare facilities in West Germany.
•
Emerging skills shortages and the bleak labour market prospects of the low skilled highlight
the need to re-dynamise the educational progress of the labour force, both in initial
education and job-related further training.
Without the enormous challenge of transforming the
East German economy, one may think, the
corset of structural inflexibility would not have hurt the German labour market as much as it has
in the past decade. In any case, in terms of comparison to the other larger EU Member States,
Germany’s labour market structures do not always look tremendously bad. But the European
experience of the past 30 years also shows that it is precisely in the presence of economic
shocks that rigid labour market institutions produce painful and long-lasting effects.
Moreover, interdependence of labour market structures translates partial malfunctioning into a
bad overall performance: It is through their interactions that individual
problems present a major
impediment to employment and ultimately to GDP growth. (for a discussion of labour market
institutions’ complementarity see e.g. Belot/van Ours (2000), Buti et al. (1998)).
•
Wage levels, reservation wages and non-wage labour costs have a combined impact on the
low-wage/low-skills segment of the German labour market, that translates
inter alia
into the
economy’s weakness in providing low-paid services. It is however not straightforward to
assess the relative importance of wage floors, taxes and (high, linear) social security
contributions as a deterrent to labour demand and the tax/benefit system as a disincentive to
labour supply: Recent studies disagree even on the wage elasticities
of labour supply and
demand in the low wage segment (see Fels
et al
. (1999) for an overview).
•
Interdependence also exists between labour market flexibility and wages. In the reaction to
a shock (aggregate) wage flexibility and flexibility of hiring and firing are, to a certain
extent, substitutes (cf. McMorrow (1996)). The same argument holds for the cyclical
adjustment of individual labour market segments. In the 1992-94 downturn the shake-out
was strongest for low-skilled workers. It would probably have taken
a much higher amount
of flexibility in work contracts in order to swiftly reverse this in the following upturn.
Instead, even in the upturn their employment perspectives have not improved. The increased
use of ‘atypical’ contracts could not compensate for rigidity in ‘normal’ contracts and wages
at the same time.
