Has Germany Been Successful Running a High-Wage Manufacturing Sector?

Stephen Silvia

American University

Dr. Stephen Silvia is a Geoeconomics Non-Resident Senior Fellow at AICGS. He is a Professor of Economics in the School of International Service at American University, where he teaches international economics, international relations and comparative politics. He researches comparative labor employment relations, and comparative economic policy, with a focus on Germany and the United States.

On 13 July 2012, The Washington Post reported on a conversation that President Barack Obama had a year earlier with Ron Bloom, then his top adviser on manufacturing.  Obama asked, “Why is Germany so successful at running a high-wage manufacturing sector?”  Bloom replied that Germany’s secrets were its apprenticeship system and banks that prioritize manufacturing.  Whereas the first point has some merit, the last time the second was significant was before the disco era.  Mr. Bloom would have better served the president had he challenged the premise in Mr. Obama’s question, because Germany’s success in maintaining high-wage jobs has been greatly exaggerated.

To be sure, some of the finest manufacturing firms in the world have their headquarters in Germany.  There is also no disputing that Germany’s positive current account is principally the result of a substantial trade surplus in manufactures.  Nonetheless, over the past few decades, most trends in German manufacturing and the labor market have not been positive.

First, let us look at manufacturing as a share of employment.  It has fallen steadily over the decades in Germany, just as it has in the United States.  It is currently below 20 percent of the total labor force.  Although this percentage is higher than in the United States, the pace of decline has been comparable.  Second, let us consider wages.  The picture is by no means one of robust growth.  To the contrary, like the United States, Germany has also experienced stagnating wages for some time.  OECD data show that real net income per employee in Germany shrunk by 0.1 percent per year in the 1980s, was stagnant in the 1990s, and declined by 0.4 percent per year in the 2000s.  Third, like the United States, Germany has become a less equal society.  The Gini coefficient, which is a measure of inequality, drifted significantly upward by over four percentage points over the past decade, reaching .29 by 2010.  Labor’s share of national income has also fallen from the equivalent of 72.9 percent of gross domestic product (GDP) in 1981 to 63.6 percent in 2010.  German productivity growth has also been lackluster in recent years.  For the decade of the 2000s, real output per hour worked increased by only 1.1 percent.  In sum, manufacturing has been shrinking in Germany, just as it has in the United States, and German labor market performance in recent decades is nothing to write home about.

What, then, explains Germany’s recent sterling economic reputation?  Three things: First, Germany has managed to bring down its unemployment rate from 11.2 percent in 2005 to 5.9 percent in 2011, which was remarkable, but it did this largely by deregulating its labor market to discourage individuals from staying on unemployment insurance and expanding opportunities for part-time jobs in the service sector.  Short-time work also saved hundreds of thousands of jobs during the financial crisis.  These measures have been laudable because of the larger social objectives they accomplished—in particular, reducing unemployment—but their side effect has been to erode rather than advance high wages.  Second, even though the manufacturing share of employment has shrunk and inequality has grown in Germany, the absolute levels of both measures are still so much better than those in the United States that conditions still look considerably better in Germany when compared to the U.S.  Third, Germany has posted a current account surplus amounting to at least 4 percent of its gross domestic product every year since 2004.  A recent analysis by Germany’s central bank suggests two factors as the primary contributors to the recent surge in Germany’s current account: a shrinking population and a falloff in domestic investment.[1]  The three decades of wage restraint mentioned above also contributed to the expansion of Germany’s current account surplus.  None of these developments the U.S. would wish to emulate in order to improve its current account.

It is thus ironic that Mr. Obama was looking to Germany for answers to problems that Germany itself has so far been unable to resolve.