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Germany’s Economy Runs on Low Wages

Germany’s Economy Runs on Low Wages

(Bloomberg Opinion) -- As the German economy reverts to a slow and steady growth trend after a short-lived boom, it can rely on an unusual resource that helps to protect it from declines: A bigger low-paid workforce than even most economists realize.

Last week, Markus Grabka and Carsten Schroeder of the German Institute for Economic Research in Berlin reported on this phenomenon. They noted that in 2017, when the country reported near-full employment, about 9 million German workers were on low-wage contracts – that is, they earned less than two-thirds of the median hourly wage. That was 24.5 percent of all jobs, significantly more than the 18.9 percent share of low-wage workers reported by the Organization for Economic Cooperation and Development for 2016. 

The share of low-wage workers, according to Grabka and Schroeder, has not declined since 2008. The percentage doesn’t include self-employed people, apprentices, trainees and people in military or alternative civilian service programs, and it means the German economic engine essentially runs on what is, for Western Europe, cheap labor. 

The median hourly wage the researchers used was 15 euros ($16.9) in 2017 – less than in 2003 but more than in 2013. The drop is largely explained by the Hartz labor reforms of the early 2000s, which were intended to get the long-term unemployed off government support and make them look for jobs. Excluding secondary employment from the calculation, the low-wage workers in Germany take in about 10.80 euros an hour; based on 35 hours a week, that’s 19,656 euros a year – less than the average wage in any OECD country except Mexico. 

Low-wage jobs make up 30 percent of primary jobs held by people with a migration background – immigrants or children of immigrants – and 33 percent of the total in Germany’s post-communist eastern states. The earning power of both immigrants and easterners is comparable to that of workers in some developing nations. That, to a large extent, is what makes Germany more affordable to live in than other wealthy European nations. It also helps fuel the country’s export dominance and huge trade surplus.

Upward mobility is low. People are stuck in the low-wage economy without much of a chance at advancement. For 27.9 percent of women, the primary job was low-wage, compared with 17 percent of men.

In recent years, Germany’s leftist political parties worked to improve the lot of the worst-paid workers. The introduction of a minimum wage in 2015, pushed through by the Social Democratic Party, the junior partner in the last two governing coalitions, increased the incomes of the poorest workers, but it hasn’t reduced the share of low-paid jobs in the economy.

Reacting to the export boom that lasted through 2017 and started deflating in the second half of 2018, the Social Democrats have demanded further improvements, calling for an end to the Hartz reforms. But the center-left party, as well as the Greens and the far-left Die Linke, which also oppose Hartz, are out of sync with the economic cycle. Germany cannot afford a less flexible labor market. And more government-decreed generosity to workers would be harmful when factory orders are shrinking and export demand is threatened by external factors such as China’s trade war with the U.S. and the Trump administration’s threats of protectionist tariffs against European goods.

It’ll take some time for German workers to realize that the window for a wage structure like those of France, Austria or the Nordic countries is closing. The threat to growth reflected in the current, dismal economic data – a 3.9 percent decline in industrial output since the May 2018 peak and a 13 percent drop in foreign orders since December – means it would be dangerous to make lasting adjustments to labor protections. During the boom, the reports of increasing national prosperity made workers hungry for change. According to the Hans Boeckler Foundation, which tracks labor protests in Germany, in 2018, more than 1 million working days were lost to strikes, up from 238,000 days in 2017, and the number of strike participants has increased to 1.2 million from 131,000. The increased activity is likely to continue until it sinks in that the good times didn’t last and companies aren’t hogging cash at workers’ expense.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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