German lawmakers on July 3rd approved the introduction of the country’s first national minimum wage of $11.75 per hour. For the last decade, Germany’s greater “labor flexibility” allowed its economy to flourish, while most of the other European Union members’ economies stagnated. Rather than embracing the policies that helped Germany succeed, other EU members have forced Germany to conform to the failed labor policies of many of its EU neighbors.
Germany was called the “sick man of Europe” in 2003. Approximately 4 million or 11.6% of its 34.5 million workforce was unemployed and on public assistance. Rather than join the chorus of defeat, Prime Minister Gerhard Schroeder of the German Social Democratic Party (SPD) unveiled a package of reforms that he called Agenda 2010.
The key elements of the reform package included the following: 1) expansion of flexible forms of employment such as temporary work, fixed-term contracts, and small-scale employment, referred to as “mini jobs;” 2) restrictions on welfare benefits for the unemployed; 3) providing incentives for the unemployed to accept part-time jobs; and 4) encouraging higher labor force participation for women and older persons.
The SPD until 2003 was known for promoting social values such as collective bargaining, workers’ rights, and the expansion of state benefits. However, Schroeder declared “We [Germany] will have to curtail the work of the state, encourage more individual responsibility, and require greater individual performance from each person. Every group in the society will have to contribute its share.”
Despite fierce domestic opposition from labor groups that saw reform as abandonment of social progress and Christian Democratic Union opposition leader Angela Merkel who derided reform as unambitious, nearly 90% of the ruling SPD Party members approved Agenda 2010 in June 2003. The effort to pass Agenda 2010 redefined the SPD from the servant of labor unions to the party of economic reform.
The practical impact of Agenda 2010 was to make Germany’s labor market much more flexible than its EU competitors. Making it easier for small businesses to fire employees lowered their risk of hiring them. Limiting unemployment benefits to one year, or 18 months for those older than 55, made workers less picky about the jobs they took.
By 2007, German growth had tripled to about a 1.5% rate, and unemployment fell from 11.6% to 8.5%. As the Great Recession drove unemployment up in the U.S. from 4.6% in 2007 to 9.0% in 2011, German unemployment fell to 7.1%. The unemployment rate continued to fall and is now at 5.1%. Even more impressive, German youth unemployment stands at 7.9% versus French youth unemployment which has risen to 23.1%.
Labor reforms have allowed Germany to become so internationally competitive that, since passage of Agenda 2010 in 2003, annual German exports rose from about $500 billion to $1.3 trillion. That compares to neighboring France where exports only grew by 25% to about $450 billion during the same period.
Germany’s success should have caused other EU countries, such as France and Italy, to change their inflexible labor laws. Instead, its neighbors demand that Germany conform to less labor flexibility by passing a minimum wage of $11.75.
The author welcomes feedback and will respond to reader comments.
From July 15th to July 29th, Chriss Street will be teaching “Entrepreneurship and Capitalist Business Strategy” at Ho Chi Mihn University in Vietnam.
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