Internal Flexibility and Wage Restraint as Key Factors for the German Labor Market Miracle

Former DAAD/AGI Research Fellow Alexander Reisenbichler and Kimberly J. Morgan, an Associate Professor of Political Science and International Affairs at George Washington University, recently published a chapter entitled “The German Labour Market: No Longer the Sick Man of Europe” in a new e-book that focuses on the German economic model and includes high-level contributions from both sides of the Atlantic.

Today, Germany’s economic hegemony within Europe is striking. The country that, by the end of the 1990s, was dubbed the “sick man” of Europe has been propelled to the forefront of the European scene with the prolonged economic and financial crisis. Reisenbichler and Morgan highlight several key economic indicators to prove this transformation: employment and unemployment rates, ability to borrow money at very low cost and to generate tax revenues, growing population thanks to a strong immigrant influx, and ability to balance its budget and to stabilize its debt.

The authors show that this remarkable turnaround can be explained by several factors. First of all, Reisenblichler and Morgan attribute the German labor market miracle to decades-long internal adjustments between labor and business relations. Second, they find that German firms managed to moderate wages while adjusting working time which, in return, has boosted Germany’s international competitiveness since the mid-1990s. All these measures combined enabled Germany to reinvigorate its export-oriented industries and to create a toolkit of flexible labor market instruments that allowed firms to successfully restructure themselves in recent decades.

The only dark spot on the horizon, according to the authors, is the low level of public and private investment in Germany. While economic activity has picked up, public investment in key sectors (infrastructure, education, and R&D), especially in times of record-low interest rates and budget surpluses, remains highly needed to boost economic growth within the country and the euro zone.

You can download the book for free here.

The full reference of the article is: Alexander Reisenbichler and Kimberly J. Morgan, “The German Labor Market: No Longer the Sick Man of Europe,” in: Brigitte Unger (ed.), The German Model: Seen By Its Neighbors, London: Social Europe Publishing, 2015.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.