It’s the success stories that worry me

by on September 4, 2013 at 10:48 am in Economics | Permalink

Also known as “the economy that is Germany,” Adam Posen offers a very good analysis:

Since 2003 a falling unemployment rate has been the consequence of the creation of a large number of low-wage and part-time or flexitime jobs, without the benefits and protections afforded earlier postwar generations. Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe. Average wages increased by more than inflation and productivity growth in the past year for the first time after more than a decade of stagnation.

…Germany’s productivity growth has been low compared with its peers. Growth in gross domestic product per hour worked is 25 per cent below the OECD average, whether one goes back to mid-1990s or looks at just the past decade – and whether or not one excludes the bubble years for the US and UK. With these productivity numbers, it is no wonder German business is competing only by reducing relative wages and moving production east.

There is much more here at the FT, the piece is interesting throughout, though I am skeptical of Posen’s claim they could have done much better than they did.

Marian Kechlibar September 4, 2013 at 11:15 am

On the other hand, I consider the German solution with part-time jobs to be brilliant. For reasons which economists just do not take into account.

Being employed, even if for half a day, has a significant impact on your morale and your sense of self-worth. At the same time, you do not lose as many skills as if you were home. At the very least, you must force yourself to get up at the morning and go to work.

Even as those psychological effects aren’t directly measurable, I definitely believe that they have a huge impact in the aggregate. After all, we’re talking about people here, and not coal or bananas.

Frederic Mari September 4, 2013 at 1:59 pm

Yes and no.

What you describe is real and valuable but working in a dead-end job with no prospect AND knowing it is going to be the boon traditional work is for morale and self-worth in our societies. Those people are not students or caught in a temporary set-back. Some have been earning survival wages for a decade…

yo September 4, 2013 at 2:44 pm

We take part time jobs because the marginal tax on full time is so high it’s not worth your time. Say you earn E5k a month before tax full time (college educated 5 yrs experience average) that’s roughly E2.5k after tax (=Lohnsteuer, Solidaritätszuschlag, Rentenversicherung, Krankenversicherung, Pflegeversicherung, Arbeitslosenversicherung including the respective employer shares). Now you work part time 50% and earn half before tax but you still get roughly E1.7-1.8 per month after tax.
Work half time, earn 70-80%.

JWatts September 5, 2013 at 10:35 am

So, the Laffer curve.

Marian Kechlibar September 4, 2013 at 11:18 am

BTW If an employer employs someone part-time and that person seems to be productive, or learns to be productive, there is an incentive for the employer to extend the job to full-time one. Productive employees are a very valuable asset. I have seen this pattern often, especially in small and middle-sized corporations.

And if that person isn’t productive, the employer loses less money by firing him/her early, because the part-time salary is a corresponding fraction of the full salary. This is especially case of people with bad attitudes or unable to get on with others; this kind of problem manifests within weeks.

Brian Donohue September 4, 2013 at 11:35 am

“With these productivity numbers, it is no wonder German business is competing only by reducing relative wages and moving production east.”

Yeah, ya might want to check the arrow of causality there.

Frederic Mari September 4, 2013 at 2:01 pm

Seconded.

It’s probably chicken and egg, though. What was first? Low productivity or employment of near ZMP workers? And it can be a self-reinforcing cycle…

comment September 4, 2013 at 11:36 am

The trend changed in last several years and the creation of “sozialversicherungspflichtige” jobs now exceeds that of atyptical jobs. In 2011 the share of atypical employment decreased.

Ignacio Concha September 4, 2013 at 11:57 am

I think that Germany’s solution is better than the system that exists in other European countries. Of course is easy to maintain your productivity per worker if you keep a significant number of people out of the workforce, collecting unemployment benefits. If you added the productivity of those persons (which is zero), you would find that Germany may not be below the median income in Western Europe.

happyjuggler0 September 4, 2013 at 3:11 pm

Of course is easy to maintain your productivity per worker if you keep a significant number of people out of the workforce, collecting unemployment benefits. If you added the productivity of those persons (which is zero), you would find that Germany may not be below the median income in Western Europe.

+1

I am always amazed that there are economists who don’t seem to recognize this fact.

TMC September 4, 2013 at 5:40 pm

Hello! France

Andrew Edwards September 4, 2013 at 12:18 pm

Maybe-slightly-related question. Does anyone know why Germany’s house prices have seen no appreciation at all in the past few decades? I was playing around with these charts and among the G8 they seem to be a complete outlier (OK Japan too but that one I understand)…

http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

Ape Man September 4, 2013 at 12:23 pm

If you understand Japan why do you have problems with Germany? Demographic situation is not that different between the two countries. Also, I have to think that unification had some downward effects on German house prices although I would have a hard time proving that with the chart you linked to.

Therapsid September 4, 2013 at 1:08 pm

For some reason the international press doesn’t emphasize Germany’s demographics the same way they do for Japan and Russia. The country’s population growth rate fluctuates around zero and the fertility rate is roughly the same as Japan’s at approx. 1.4.

collin September 4, 2013 at 2:31 pm

The press tends to simplify a lot things and Japan (with falling yet aging population) and Russia (just falling population) are the obvious problems of depopulation. (Germany is ten years behind Japan here and the unification delayed the cheap labor issue for Germany.)

It looks Germany was ahead of the US on this one that the job market here is following a lot of flexible and part-timing workers. I suspect this will continue to diminish the US family formations for the next 10 years.

A.B Prosper September 4, 2013 at 7:37 pm

Germany has a TFR of 1.42 and much of that among immigrants. That is going to really put a bite on their industry since virtually every nation that could export to has the same issue.

My opinion only but I think modern society has reached a social carrying capacity. Not technical, we can with some work feed many more people but social.

Basically our structures are losing the means to distrbute wealth in ways that allow people to start families. Long term this is a disaster for capitalism either it changes to some far more socialist (that may be a market society but it won’t be capitalist) or the demography makes all growth zero sum. Basically if the population of afluent consumers is shrinking every year and more than one party makes similar goods, the only way for me to increase my income is to take it from some other person.

Adrian Ratnapala September 5, 2013 at 3:52 am

I’ve heard the culprit here is the German culture of stay-at-home mums. The informal culture gets embedded in lots of formal things like school opening hours. The theory is that this is a incentive to not have kids. I hazard a guess that America is more flexible in this regard.

yo September 4, 2013 at 2:37 pm

Housing prices came back last year. I’d say about +25% in Berlin, Hamburg and Frankfurt.
Former Eastern Germany and remote locations still a bargain tho.

steve September 4, 2013 at 12:20 pm

If you don’t employ your low productivity citizens at all, say as in France with a high unemployment rate, then your productivity per employee goes up.
If you employ workers with low productivity in part time jobs, say as in Germany with a lower unemployment rate, then your productivity per employee doesn’t look so good even though your high productivity workers are just as productive. You tell me which model is better.

Florian September 4, 2013 at 12:26 pm

“Growth in gross domestic product per hour worked is 25 per cent below the OECD average, whether one goes back to mid-1990s or looks at just the past decade ”

1. “The last decade”:
Well, an increase in employment is bound to have that effect.
10 years ago, unemployment was much higher in Germany.
Obviously, those unemployed back then had below average productivity.
Putting these people in jobs will of course reduce productivitiy ON AVERAGE.
So, even if every single German empoyee might be more productive than 10 years ago, the average might well be stagnating.

2. “Going back to the mid-1990s”:
I’d like to see the numbers, because the claim looks doubtful.
In the mid-1990s, Germany was integrating East Germany. Millions of unproductive jobs were lost. It ist therefore highly unlikely, that AVERAGE productivity didn’t increase sharply in these years.
Of course, if one would extend the period to the the late 1980s, the situation would be different:
in this case, late-80s West German high prouctivity would be compared to a much lower AVERAGE number for Germany a few years later.

3. Bear in mind, that the article analyzes not productivity but “productivity growth”.
If German productivity was way above average in the past (which seems plausible, given the country’s traditional focus on manufacturing and rather small service sector) a below average GROWTH for some time is what would be expected.
This holds true, even if (high productivity) manufacturing is in decline in all developed nations.

Luis Pedro Coelho September 5, 2013 at 3:06 am

Exactly.

A focus on productivity without caring about the unemployment rate is always a canard.

prior_approval September 4, 2013 at 1:27 pm

And not a mention about eurogeddon and its horrible effects?

This blog never used to miss the opportunity to proclaim the euro the root of all monetary evil.

Sad to see how the euro has shrunk as the all-encompassing explanation in the last couple of years – but it isn’t as if most people remember an economist’s failed predictions.

Brian Donohue September 4, 2013 at 2:36 pm

Stay on point man. I fully expected you to lecture us all on the need for the US to increase labor flexibility in order to boost employment, as is done by the geniuses in Germany.

JWatts September 4, 2013 at 3:04 pm

Your comment seems trollish. You claim the blog puts too much negative emphasis on the Euro, but readily admit that it’s not mentioned in the preceding post.

prior_approval September 5, 2013 at 3:17 am

Well, just a couple of fall semesters ago, such a tend would have been seen as simply another signpost on the way to the unavoidable and oncoming eurogeddon.

Interestingly, exactly none of the quite reasonably described real world challenges involving the euro have gone away. And eurogeddon will arrive, someday – just like rupeegeddon, renmimbigeddon, yengeddon, dollargeddon, etc – all currencies die in the end, after all.

What has changed is saying something like ‘eurogeddon’ sounds foolish today. But interestingly, what hasn’t changed is the influence, for good and ill, of the euro on Germany’s (and the eurozone’s) economy. Particularly if using 2003 as a baseline.

And yet, not a single word wasted on what was a burning crisis here, not so long ago.

Makes one wonder just how deeply believed various positions of this blog are, or are the ideas mainly about the churn. What was stagnation yesterday is not stagnation today. Which does create a certain dilemma for tomorrow – an old GMU prof used to point out just how hard it would be to top the term ‘post modern.’

Nonetheless, I am confident that Prof. Cowen will be able to handle all terminology challenge masterfully – beyond average, as he already has said, actually. Since otherwise, we wouldn’t hear about it.

JWatts September 5, 2013 at 10:38 am

So, the blog and Tyler and Alex adapt, whereas you remain trapped in the past? Yes, that seems to fit.

prior_approval September 6, 2013 at 2:28 am

Interesting way to put it – I scoffed and mocked eurogeddon endlessly when it was first proclaimed here, and now that eurogeddon seems a silly thing to say in public, this is a sign of adaptation on the part of those who were foolish in the past? Sure – it isn’t as this site does not have the courage to be wrong, over and over again. Though loyal readers do tend to skip over that reality.

And note that I am the one that pointed that the role of the euro, and its challenges, are a very real part of looking at Germany, especially since 2003.

But that would require something more than superficial linking to actually explore in some insightful manner, and doesn’t have a neat (though now mockery worthy) catchphrase like ‘eurogeddon’ to hang optimization strategies on.

And as a related question – who was trolling? The peddlers of ‘eurogeddon,’ or those who derided the idea at that time? (The euro will end, no doubt – but anyone predicting it to fall apart in the last couple of years obviously had zero awareness of how the euro works in the eurozone, or how almost a generation of modern Europeans has known nothing but the euro as the money they use every day.)

Romeo Stevens September 4, 2013 at 3:31 pm

payroll taxes go down -> marginal workers get hired -> more low wage work

and this is a bad thing?

mpowell September 4, 2013 at 4:12 pm

No, the bad thing is the lower than average GDP growth per unit hour worked. The explanation may be that the period in question Germany was changing policy and increasing employment among low productivity workers and/or integrating old East Germany. That is a pretty compelling explanation but it’s quite important to whether there is a problem here or not.

genauer September 4, 2013 at 4:53 pm

the FT and the Economist are just trolling out this nonsense at a rate of 3/week.

Together with low service sector productivity and the last 2 weeks with their lust for blood in Syria-

Nothing new

We just laugh about the “sour grapes” nonsense .

genauer September 4, 2013 at 4:57 pm

Adam Posen is the exact opposite of “very good analysis”. It is just plain partisan blathering.

Germany is just growing steadily and solidly in effectiveness:
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf

the FT and the Economist are just trolling out this nonsense at a rate of 3/week.

Together with low service sector productivity and the last 2 weeks with their lust for blood in Syria-

Nothing new

We just laugh about the “sour grapes” nonsense .

sandeep yadav September 4, 2013 at 11:24 pm

We must understand the reality of subject and matter…!

genauer September 6, 2013 at 1:48 pm

test,

sorry for that

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