Commentary: Germany: Coddling Labor Is No Way To Create Jobs

Workers at DaimlerChrysler and Ford Motor Co. are staging daily warning strikes of two hours or more. At engineering outfits around the country, employees have been walking off the job and taking to the streets in protest rallies. After two years of peace, labor confrontation is once again heating up in Germany, as the country's strongest union, IG Metall, digs in its heels over its demand for a 6.5% pay increase this year. The employers' federation for metalworkers, Gesamtmetall, has grudgingly countered with an offer of 2.3% plus 0.5% based on companies' profitability. If the employers don't up their offer by Feb. 11, IG Metall pledges to hold a vote for an all-out, national strike.

UNREALISTIC. The showdown is a sign that German Finance Minister Oskar Lafontaine ought to rethink his labor and employment policies. The Social Democratic Party (SPD) chairman and his brain trust believe that by raising wages--as well as by channeling more money through tax cuts to lower-income families--they can spur faster growth and create more jobs in Germany. That's why Lafontaine has called for workers to reap the benefits of Germany's improved competitiveness and productivity, which rose 2.8% last year alone. But Lafontaine's proposal has dangerously emboldened union leaders to make unrealistic demands, while damaging Germany's chances of reducing its painfully high 10.8% unemployment rate.

Ironically, Lafontaine would be better off placing his bets with capital, rather than labor--especially if he cares more about jobs than his popularity rating. Consider the U.S. example. When productivity began rising there in the early 1990s, American corporations--not workers--largely reaped the early benefits. Corporate earnings soared, while wages stayed flat. The result: booming returns on capital that companies invested in expansion. Since then, unemployment in the U.S. has fallen to just over 4%, down from 7.8% in 1992.

The trouble with Lafontaine's economic theory is that higher wages in Germany mostly don't get channeled into the real economy. German workers are already the highest paid in the Western world--$28 an hour for wages and benefits in the highest-paid western part of the country--and many simply put a big chunk into their already bulging savings accounts. At the same time, the government takes close to half of every mark paid in wages for income taxes and welfare contributions. Thus, little is left over to flow into new spending on goods and services that would create more jobs. Meanwhile, higher wages once again could force companies to retrench as they did in 1995, after the metalworkers won a big pay increase and wage costs rose 10% in a year. When growth sputtered, thousands of jobs were lost. Unemployment hit a high of 11.8% in the first quarter of 1998.

But Lafontaine's biggest mistake is that he refuses to tackle the inflexible structures at the root of Germany's labor problem. Cushy social benefits add 80% to a company's payroll, for example, and it's extremely difficult for companies to hire or fire employees. By contrast, U.S. and British companies pay only about half that amount for benefits. Such rigidities have compelled German companies to increasingly channel new investments overseas. Yet Chancellor Gerhard Schroder's new government has already rolled back the few minor pension and hiring reforms that the previous Kohl government finally pushed through.

The SPD was elected last September with big support from organized labor. Apparently, it's payback time. Even if IG Metall wins less than it wants--about 3.5%, figures Goldman, Sachs & Co. managing director Thomas Mayer--unemployment could jump to 11.1% by yearend. Until Schroder and Lafontaine get serious about helping companies create jobs, Germany's millions of unemployed will continue to pay the price.

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