Adjusting Badly the German Welfare State, Structural Change, and the Open Economy

Abstract

Germany was comparatively successful in weathering the macroeconomic crises of the 1970s and early 1980s, and its industrial sector remained highly competitive throughout. Nevertheless, unemployment has been high and is still rising. The impact of unification is only a part of the explanation. Instead, the very formula for Germany's past success is also the key to its current problems. Cooperative labour relations, on which German international competitiveness depends, were maintained by using the welfare state's generous exit options from the labour market for older and less productive workers. Given the prevailing mode of financing the “Bismarckian” welfare state, however, the resulting rise of social security contributions added to the costs of labour throughout the economy. As the government relied on the same solution in coping with the massive employment losses in East Germany after unification, non‐wage labour costs have risen to a level that can be sustained only by highly productive types of work. This constrains the growth of private services that have compensated industrial job losses in other countries.

Not so standard anymore? Employment duality in Germany

“…Up until the mid-2000s Germany was often perceived as a country of high unemployment and medium labor force participation at best (Manow and Seils 2000). However, over the last few years, in particular in the aftermath of the Great Recession in 2008-09, this picture has changed dramatically (Rinne and Zimmermann 2011;Eichhorst 2014;Caliendo and Hogenacker 2012;Dustmann et al 2014).…”

Activation Policies in Germany: From Status Protection to Basic Income Support

“…It has also been prominently characterized as a "frozen welfare state" highly resistant to change (Manow/Seils 2000). Facing a difficult economic environment since the mid-seventies, policy makers and social partners used active and passive labour market policies to reduce labour supply by taking "surplus labour" out of the labour market and shifting the unemployed to benefit schemes and active programs that were not effectively oriented towards swift reintegration into the labour market (Manow/Seils 2000).…”

“…It has also been prominently characterized as a "frozen welfare state" highly resistant to change (Manow/Seils 2000). Facing a difficult economic environment since the mid-seventies, policy makers and social partners used active and passive labour market policies to reduce labour supply by taking "surplus labour" out of the labour market and shifting the unemployed to benefit schemes and active programs that were not effectively oriented towards swift reintegration into the labour market (Manow/Seils 2000). For some decades, active and passive labour market policies provided a "convenient" and "socially compatible" way of subsidizing entrepreneurial adjustment to dy-namic global markets and help stabilize competitiveness of manufacturing that was at the core of the German employment system (Streeck 1997) while at the same time facilitating a "social policy" approach to unemployment emphasizing income protection and "benevolent" treatment through active policies.…”

“…However, the German "high equality, low activity" equilibrium (Streeck 2001) resulted in an ever increasing burden of non-wage labour costs as a growing number of benefit recipients in the labour market directly translated into rising social security contributions and fiscal pressure on the state budget that was used to cover deficits in social insurance. Thus, the sustainability of the German "welfare state without work" (Esping-Andersen 1996) was at risk as it tended to erode its own financial basis in particular facing increasing pressure on wage costs stemming from more intense international competition (Manow/Seils 2000).…”

“…One explanation is German reunification. As a consequence of reunification in Germany, not the restructuring, but the expansion of traditional instruments of active labour market policies, particularly job creation schemes, but also passive income support was on the agenda in the beginning of the 1990s (Manow/Seils 2000). Another explication refers to the strong role of social partner self-administration in the Public Employment Service (Trampusch 2002) that were interested in controlling resource allocation to favour their clientele, take "surplus labour" out of the labour market and shift it to active and passive labour market policies and other social benefit schemes while deficits in unemployment insurance were covered by the federal government or higher contributions.…”