How to preserve the social market economy in a modern Europe.
Listener: 30 July, 2005.
Keywords: Labour Studies;
Reform is a weasel word, avoiding specifics because advocates are either not sure what it means or they don’t want others to know. So, when the German Government and the Goethe-Institut offered me the opportunity to study the German economy, I just had to look at the reality of its “reforms” debate. Some of the implemented ones – pressures on the unemployed to take up work – seem not too different from ours. But some proposals have the ideology underpinning our Employment Contracts Act (ECA).
Even more than New Zealand, Germany had what Bruce Jesson called the “historic compromise” between business, government and unions (which the ECA ended). It has a “social market economy” in which businesses are given considerable market freedom in exchange for social protection of the workers and the population as a whole largely delivered through the market. (Germany is not alone. Other Western European economies operate in a similar way.)
Others can report on the complex governance of business where there is considerable union-worker involvement. I focused on wage determination, which is said by German reformers to be too inflexible. They often object to the community ethic that underpins the social market economy, preferring a more individualistic approach to society. Their proposed “reforms” include cutting public spending (including on social benefits), lowering taxation (which would increase income inequality), privatisation (including of the health system) and weakening of the unions.
Although much more productive than that of New Zealand, the German economy has two main problems: it grows too slowly and it has too much unemployment. Reform, we are told, would increase productivity (the ECA did not) and lower unemployment (it requires a very tenuous argument to say that the ECA did). Reality is so much more complicated.
Germany has an excellent export record, recently taking over from the US as being the world’s largest exporter. This statistic depends on treating the countries of the European Union as separate economies, but the states of the US as united. California is probably the world’s biggest export economy on a consistent definition. But, in any case, Germany is doing well, and improving.
German exports are largely technologically advanced, using high-skilled workers who must be being paid the going world wage rate (relative to their productivity), given the export success. But unemployment averages around 12 percent of the labour force, which suggests that the unskilled are costing German businesses too much to employ.
German unions maintain rigid wage differentials for skills in order to protect their poorest workers. With no unions, the differentials may open up. Would that generate more jobs? Economic theory says it might, but not necessarily a lot more. The skilled and unskilled labour may not readily substitute. A BMW assembled by cheaper low-skilled workers might not be the quality Beamer that its current reputation evokes.
The unskilled really need new industries. (There are some terrific, but expensive, tourist locations in Germany. Cheaper unskilled labour might generate lower prices and more tourists.) But lower wages for the unskilled would mean they are poorer, even though some of the unemployed might be better off if – a big if – they got jobs.
Another pressure on the established European welfare states is the EU’s enlargement. Workers from the poorer countries to the east and south threaten to undercut the pay of low-skilled workers in Germany and elsewhere in Western Europe. That was perhaps the visceral reason for the French and Dutch rejecting the proposed EU constitution.
If current social objectives are to be maintained, there may have to be greater flexibility in wage differentials than in the past (the unions already tend to turn a blind eye to lower wage rates in lower-productivity eastern Germany), and greater emphasis on social support of the poor via tax and benefits (as we do with our family assistance). The reality of the modern dynamic economy is that the wage system cannot generate a fair income distribution. Trying to make it do so, rather than using the tax and benefit system, is likely to generate more unemployment among the poor, greater income inequality and an inferior welfare state. Ironically, that is nearer the goal of the reformers with individualistic aspirations.