If Germany’s Got a Jobs Miracle, Not Everyone’s a Believer

Merkel's challenger wants Germany's labor market to be the new front in the fight against inequality

Martin Schulz

It's a story that's been told many times: Germany's record-low unemployment is the result of previous reforms and wage restraint, and testament to the country's success as an international trade champion. 

Martin Schulz, the Social Democrat challenging Chancellor Angela Merkel in elections this September, doesn't quite buy it.

That's because according to his view, even with the lowest unemployment rate since reunification 27 years ago, Germany's job market is hiding a growing class of low-wage earners, yawning income inequality and precarious conditions for older workers. And just as these themes helped propel Donald Trump into the White House, Schulz wants to make labor a central battleground for his campaign. 

“A lot is going well and overall we can be proud of what we've achieved. The truth is also that the success model is showing cracks,” Schulz said in February. “The link between economic efficiency and social solidarity is increasingly being lost.”

So Schulz and the Social Democrats are proposing to roll-back some of the “Agenda 2010” labor-market reforms that were introduced in the mid-2000s  – by their own party, under then-Chancellor Gerhard Schroeder, when unemployment was at a post-war high. While they're campaigning on the basis of the fight against inequality, Merkel's party is countering with traditional conservative medicine  – tax cuts.

 “It may be that the Social Democrats want to campaign on the issue but it isn't based on reality,” Finance Minister Wolfgang Schaeuble said in a ZDF television interview Wednesday. “There is less social inequality in Germany than in any other major industrialized country.” 

International comparisons may not matter to German voters, especially those in the low-wage sector. Schroeder's reforms helped expand the kind of employment that pays a low-enough salary to escape most taxation, the so-called “mini job.”  ING-Diba AG chief economist Carsten Brzeski says this “might have been the first secret to success” for improving the labor market –  but has not yet transformed into full-time employment as was anticipated. 

The reforms have contributed to a widening gap between the country's bottom and top income groups –exactly the problem that the SPD wants to address. The DIW German Institute for Economic Research cites changes in the labor market over the last two decades as a “dominant” factor behind the drop in income of the lowest 10 percent, with expansion of the low-wage sector, flexible employment situations, and lower demand for high-skilled workers contributing to lower earnings.

A report published on Wednesday by the Labor Ministry said that current data may understate perceptions of inequality, and that what also counts is whether “work is rewarded and income distribution, inclusion, opportunities for improvement, and social protection are generally viewed as `fair.'”

One of Schulz's policy proposals has been to reverse some of the previous cuts in social programs, which shortened the period during which jobless people would receive benefits and reduced social welfare for the long-term unemployed. He frequently cites the example of a 50-year old worker who has spent his or her life serving a company, only to fear being dismissed and entitled to only 15 months of unemployment support. About half of Germany's workers who lose their jobs between the age of 55 to 65 stay unemployed for more than a year, and more than a quarter remain so beyond the maximum benefit period (depending on one's age and time worked) of 24 months.

Even so, cutting the payout period has helped keep older people employed, according to Holger Schaefer, a senior economist at  at the Cologne Institute for Economic Research. He says extending it again is “the most damaging thing you can do”, because that sends the signal that it’s okay to look less intensively for a job and could incentivize people to bridge the time until retirement using taxpayer support. Schulz has proposed adding up to 24 months of support for people who use that time to seek further qualifications.

Another issue his party has pledged to address is that of encouraging parents to split working hours, and facilitating limited part-time contracts that allow workers to more easily transition back to full-time employment. Both of these proposals would target raising women's participation in the job market, an area in which Germany lags behind many of its European neighbors.

It's not that Merkel's Christian Democrats are necessarily against things like raising female labor-force participation, it's just that their emphasis is on maintaining Germany's formidable international competitiveness. Merkel, having benefited from her previous opponent's policies, is by now something of an enthusiast.

“We shouldn’t be grousing about the Agenda 2010,” Merkel said in February. “We should be thinking about an Agenda 2025.”

--With assistance from Rainer Buergin


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