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News : EU Economy Last Updated: Mar 27, 2015 - 7:55 AM

Germany at full-employment: Lessons for low-pay US manufacturing
By Michael Hennigan, Finfacts founder and editor
Mar 3, 2015 - 11:26 AM

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Source: Brookings Institution

Germany and its neighbour Austria have full employment with unemployment rates below 5% and the smaller country has had one of Europe's lowest unemployment rates for a half century. Meanwhile a recent research note suggests that the US could learn from the success of German manufacturing where average manufacturing pay is almost a third higher than in the US.

In 1965-1972 when Austria's average rate jobles rate was 1.4%, West Germany's was at 0.8% and France was at 2.3%. Austria, which is today one of the wealthiest countries in Europe has one of the lowest ratio of the population with third level degrees.

Germany had record trade and current account surpluses in 2013 while the government’s budget surplus amounted to €18bn in 2014 — 0.6% of gross domestic product — Destatis, the German federal statistics office, reported last week. This compared with a €4.2bn surplus in 2013.

The performance in 2014 was the first time all government levels — including the federal government, state and local governments and the social security fund — achieved surpluses since German reunification in 1990.

Following a rise in Germany's Q4 GDP, (+0.7% qoq vs +0.1% in Q3) as private consumption was boosted by a substantial stimulus from the drop of the oil prices, Deutsche Bank on Monday increased its 2015 GDP forecast to 2.0% from 1.4% previously. "This is especially due to the much larger carry-over effect courtesy of the marked Q4 GDP growth. In addition, we raise our Q1 GDP forecast to 0.5% qoq as the renewed oil price drop will boost consumption again. Sentiment also improved further in January/February with Ifo (the economics institute) expectations and the composite PMI pointing to 0.5% and 0.4% growth, respectively," it said.

Eurozone unemployment slightly falls in January; Germany & Austria below 5%

Analysis: Germany world's top surplus economy; UK tops deficit ranks

Automotive industry accounted for 18% of German goods exports in 2014

Wages rise

Destatis also reported last week that German negotiated wages covering about 19m from 42.7m in employment, including special payments, rose by 3.2% on average last year — the biggest increase since the statistics were first compiled in 2010.

The average consumer inflation rate was 0.9% in 2014.

The increase compared with a 2.4% pay rise in 2013 and 2.7% in 2012.

A new minimum wage of €8.50 an hour is being phased in by January 2017.

The trade union IG Metall last month negotiated a 3.4% wage rise for 800,000 metalworkers in the state of Baden-Württemberg. The regional head of IG Metall, Roman Zitzelsberger, said the deal would ensure “private consumption, the most important economic driver right now, will stay on course.”

Consumption outlays contributed a 0.5 percentage point contribution to GDP growth of 0.7% in the fourth quarter, the data showed.

Average earnings in German manufacturing are the highest of the big manufacturing nations and while German and US general pay changes tracked each other from the mid 1990s, the inflation-adjusted rise in 1985-2010 for Germany was 30% compared with 6% in the US.

The average compensation for a manufacturing worker in Germany in 2012 was $46 per hour — 28% more than in the United States.

German manufacturing wages are the highest of big industrial nations

With the collapse of communism in Eastern Europe, German manufacturers took advantage of low labour costs. For example the average hourly labour cost of €7 in Poland compares with over €30 in Germany.

Almost one in five working Germans hold a so-called "minijob" — a form of marginal employment that enables an individual to earn up to €450 a month free of tax.

The Wall Street Journal reports data from the Bundesanstalt für Arbeit (the federal employment office) that while Germany's top earners among full-time workers who contribute to the social security system saw pay rise 25% between 1999 and 2010, salaries in the lowest quintile increased roughly 7.5%. After inflation of about 18% during that period, Germany's lowest wages dropped significantly.

The German economy grew 13.5% over the same time frame in inflation-adjusted terms, leaving many Germans feeling they missed out on economic gains.

However, in recent years the strong labour market has cut what is called "atypical" employment

The end of military conscription has helped as in the past, young men could choose voluntary work for six months in nursing homes and other community services as an alternative to the draft.

Educated migrants

Destatis recently reported that between 2009 and 2013, net immigration totalled just under 1.2m people.

According to the microcensus 2013, the majority of immigrants had a high level of qualification. A total of roughly 85% of the 18 to 24 year olds had a school certificate and 5% were still in school education. The proportion of young immigrants who had obtained a school certificate qualifying them to enter higher education was especially high (55%). In the total population, roughly 86% of the 18 to 24 year olds had a school certificate and 10% were still at school.

Destatis also said that examining the vocational qualification attained shows that an especially large number of immigrants were graduates. A total of roughly 40% of the 25 to 34 year olds had a higher education degree. However, there were also many unqualified workers among them. 29% of this age group did not have any vocational qualification. In the total population, the proportion of unqualified workers among the 25 to 34 year olds was markedly smaller (14%). However, the proportion of higher education graduates was smaller, too (22%).

Lessons for US manufacturing

A briefing note by economists at the Brookings Institution and JP Morgan Chase, the US bank, says that manufacturing in Germany accounts for 20% of employment, nearly twice the share as in the United States, and generates 22% of national GDP and 82% of total goods exports. German manufacturing succeeds in the global marketplace even as the sector pays higher average wages than in the United States.

In stark contrast to the United States’ $667bn manufactured goods trade deficit, Germany’s trade surplus in manufacturing is about $425bn.

While US manufacturing has recovered since 2009, the authors say that offshoring of production to cheaper locales separated it from manufacturers’ domestic R&D operations. "These cost-cutting moves discounted the fact that innovation occurs most successfully when R&D and production are tightly linked, ideally co-located so engineers and production workers can make adaptations and bring products to market more quickly."

The note says the Fraunhofer Society has 67 institutes and 23,000 employees in Germany as well as an international presence that includes seven US-based centers. "Each institute cultivates a distinct specialization (e.g. applied polymer research, electric nanosystems, etc.) which fall under broader industries such as microelectronics, materials and components, production, surface technology and photonics, life sciences, information technology, and defense. Approximately 70% of Fraunhofer’s revenue is generated by contracts with industry and public institutions; state and federal governments contribute the remaining 30%."

It adds: "Even when American researchers develop radical innovations, defined as the creation of a new industry due to technological or scientific breakthrough, US manufacturers are often unable to bridge the 'valley of death' between the basic research phase and industrial production due to lack of capital and other key resources."

The economists say: "Three statistics may help explain Germany’s advantage in manufacturing. First, 86% of private-sector R&D occurs in manufacturing, a much higher share than the 64% in the United States.  Second, Germany translates research into new products and technologies more effectively. In 2011, Germany produced 53 patents per 1,000 researchers, compared to 39 patents per 1,000 researchers in the United States. Finally, Germany’s ability to translate research into new products derives from its rich base of graduates in STEM (science, technology, engineering, and mathematics) fields. In a ranking of 36 countries by the OECD on their share of graduates in STEM fields, Germany ranked third, well ahead of the United States at 33rd. In 2012, more than 800,000 German students participated in an apprenticeship program in the manufacturing sector."

11% of the Irish workforce is in manufacturing but only 3% of SME firms are manufacturers:

Ireland: Only 3% of Irish SMEs are active in manufacturing - Part 2

Irish Economy: Only 8% of 90,000 jobs added in 2013/14 in Industry/ ICT sectors

Fast economic convergence is a myth in Europe and in emerging economies

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