Germany: Getting Worse Before It Gets Better

For now, Schröder's labor-market reforms have boosted the unemployment rate

Eberhard Kretzschmar faces a tough choice: When his unemployment benefits run out in June, the 50-year-old former personnel manager must choose between selling his car or taking a smaller, cheaper apartment. For the past year, Kretzschmar has been living on unemployment. Occasionally he puts in time on a government-funded make-work scheme. But as Germany achieves creeping progress in reforming its rigid labor laws, middle-aged workers like Kretzschmar are stuck. "All I do is fill out job applications and collect the rejection slips," he says, taking a drag on a cigarette and leaning forward on his tattooed arms. "At a certain age, you just can't expect much anymore."

Legislative changes that took effect on Jan. 1, 2005, are aimed at encouraging people like Kretzschmar to get off the dole and back in the work force. Yet one of the side effects of the reform has been to boost Germany's unemployment to postwar highs. The March figure reached 5.176 million people, equal to 12% of the workforce. A big factor in the 1.2-percentage-point uptick so far this year is the fact that under new rules, Germans on welfare deemed capable of working must register as unemployed or lose their benefits. This had the effect of adding 380,000 new people to the jobless roles in the first three months of 2005. The Federal Labor Office also attributed part of the rise to an unseasonably chilly February and March, which kept some unemployed Germans from heading out to pound the pavement.

Germany's comparatively high jobless figure is also a reflection of the way the country compiles its data. A person is considered unemployed if he or she is between the ages of 15 and 65, works less than 15 hours a week, and is looking for a job. In contrast, the European Union's statistical agency, Eurostat, considers anyone who works at least one hour a week as employed. The International Labor Organization, which aims to facilitate comparisons across countries, showed German unemployment at 9.4% in February, well below the official figure of 11.7%. Similarly, the U.S. Labor Dept. notes that if American standards were applied, Germany's 2003 figure would have come in at 9.7% instead of 10.5%.


Of course, the intricacies of methodology do not take away from the political urgency of paring back the jobless rolls. With a key state election next month and federal elections due by the end of next year, the government of Chancellor Gerhard Schröder is scrambling to show that its labor market reforms are working, even if their impact is not being felt yet. When the February data came out, showing yet another increase, Schröder called a quick huddle with the opposition and agreed to cut the corporate income tax to 19%, from 25%. Although economists and business welcomed the move, many were quick to point out that fiscal relief isn't enough to jump-start job creation. What is keeping German companies from hiring is the combination of excessive job protection and sky-high nonwage costs.

By some estimates, employer contributions for benefits such as unemployment and retirement insurance amount to 19% of gross wages. "The tax cut is important, but the things that politicians have done to make the labor market more flexible over the past few years are just very small steps," observes Martin Werding, a labor market economist at the IFO Institute for Economic Research in Munich.

As Kretzschmar prepares for yet another job interview, he has only one request of the politicians in Berlin. "They should just stop waffling and do something to create jobs," he says. Schröder, are you listening?

By William Boston in Leipzig, Germany

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