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Sunday, 8 September 2013

Germany: About low unemployment, mini jobs and… looming poverty in Germany

Germany has been THE European powerhouse during the credit crisis and consequently many European leaders look at the country with hardly revealed envy:

  • The quality of German goods has always been proverbial and these are therefore in high demand all over the planet, even in these trying times of economic crisis;
  • The German manufacturing industry runs like a clockwork; not only the famous German car industry grows through any resistance, but also the numerous small and medium (SME) enterprises with their innovative products and traditional German quality. These SME companies form the heart of the German industrial tradition;
  • During the stints of Chancellor Angela Merkel, the unemployment dropped from 8.1% to 6.8%, with less than 3 million unemployed people on a total population of 80 million people. With this low unemployment, Germany is among the best achieving countries in Europe;
    • Merkel’s predecessor Gerhard Schröder of the SPD had put the German economy on the right track again with his policy of dramatic economic reforms and wage restraint for a number of years;
    • Due to this wage restraint policy, the German labour costs are much lower than the labour costs in other European countries;
    • Through the invention of mini-jobs aka €400 jobs, without social security premium and income taxes, many unemployed people have found a job again, albeit it a small one;
  • The German political situation is very stable. It is very plausible that German chancellor Angela Merkel of the Christian-Democrat Union (CDU) will easily win the elections for the Bundestag (German House of Commons) for a third time and continue her policy of austerity and tight budgeting.
    • And even if her opponent Peer Steinbrück of the Social-Democrat SPD wins the elections, this will hardly lead to dramatic changes in policy, as both parties largely agree about ‘the road ahead’ for Germany; 

Summarizing, it seems that Germany will be in the elite group of Europe for many years to come and its reputation of European powerhouse is very well-deserved.

However, there are some things in Germany that should worry the objective inquirer, as they could bring division in the country and disturb the ideal image of Germany in the future.These things have without a doubt something to do with Schröder’s wage restraint policy, the rigid budgettary aproach of Angela Merkel, the invention of mini-jobs and with the downfall of the German heavy industry and the difficult climb up-the-hill of East-Germany, formerly known as the German Democratic Republic. Keywords: poverty and debt!

In the past, I have expressed my thoughts and feelings about the German Wage Restraint policy of former chancellor Gerhard Schröder, based on a wonderful article of Marcel de Boer in Het Financieele Dagblad ( Please read this must-read article again.

De Boer’s main objections against wage restraint were:
  • It has a very bad influence on the domestic consumption, as it works like a double whammy:
    • it partially kills the growth potential of wages for many years to come; not only for the years of its introduction;
    • Besides that, it makes that the effective purchase power of people is steadily eaten by inflation, which further diminishes consumption;
  • Within Europe, the wage restraint made that the euro for Germany was actually undervalued, while it was overvalued for the countries in the south of Europe.
    • In other words: German products were too cheap in comparison with products from South-Europe;
    • This worked as a subsidy on German exports and a tax measure on exports from the PIIGS countries;
    • As a consequence, wage restraint caused unfair competition with countries, which didn’t introduce wage restraint; 

It has been more than two years, since I printed the aforementioned article, but it didn’t lose its value yet.

The FD wrote an article that the ‘German job miracle’ is “starting to show some scratches”. Although the tone of voice of the article is mostly very positive about Germany, it shows some drawbacks of the prolongued policy of wage restraint and austerity: 
  1. Infrastructure: In a.o. Berlin and the Ruhr-area, there are broken streets and roads everywhere. Refurbishment of existing roads and construction of new roads will costs hundreds of millions of euro’s;
  2. Poverty. More and more citizens and also children are threatened by poverty. Also many municipalities and Bundesländer (German states) go through financially tough times’;
  3. State debt. The official state debt is somewhere around 80% of GDP. However, some who looks at future obligations, concerning a.o. the pensions and social benefits, sees the debt increase to 227% of GDP 

The P-word (poverty) has been used in this FD article. Another independent party who uses the P-word again is the German central bureau of statistics ‘Destatis’ in a press release of 29 August 2013. As the German press release is more elaborate than Destatis’ English version, I used the German release and translated it to English:

In 2012, the danger of poverty has again been clearly higher in the states of the former GDR than in the states of former West-Germany. The rate of people who are endangered for poverty lies at 19.7% in East-Germany and at 14.0% in West-Germany.

Since 2005, the rates of East- and West-Germany have actually approached each other, but the danger of poverty in 2012 is still considerably higher in East-Germany. In 2005, when this measurement started, the difference was 20.4% for East-Germany and 13.2% for West-Germany.

When 2012 is compared with 2005, the risk of poverty dropped most strongly in the Bundesländer Thüringen and Sachsen-Anhalt (both formerly East-German states). The strongest increase can be seen in Nordrhein-Westfalen and Berlin.

Especially the last paragraph is somewhat worrisome. Nordrhein-Westfalen is host to the famous Ruhr-area, where the German heavy industry is situated, as well as thousands of small and medium enterprises, which produce handicraft, high-quality products and tools. Cities in this state, like Solingen, have an unbeatable international reputation for the quality and workmanship of the products that are produced there.

It is hardly surprising that the German heavy industry (steel mills, the coal and ore industry) goes through tough times currently, as this continuously has been the case since the 1960’s.

Nevertheless, Nordrhein-Westfalen is the German Bundesland, where ten of the hundred most powerful companies in the world have been residing: a.o. E.ON (energy), Deutsche Telekom, Deutsche Post, ThyssenKrupp (steel) and Bayer AG (farmaceuticals). When this German state offers an elevated and increasing risk for poverty, this is something to worry about for the Germans.

Also surprising for me is the conclusion that city/state Berlin is among the states with soaring poverty. Berlin, the official capital of Germany, is a city where you would expect growth and prosperity at the end(?) of the crisis, not looming poverty.

The main reason for this lagging prosperity (in my opinion) is the fact that Berlin is not the natural economic centre of Germany, in contrary to other capitals like London, Paris, Madrid, Moscow and Amsterdam:
  • Frankfurt is the financial centre of Germany and Europe;
  • Rüsselsheim, Wolfsburg, Ingolstadt, Zuffenhausen, Stuttgart and München are the centres of the extremely important German car industry;
  • Hamburg and Bremen are the most important German ports;
  • Düsseldorf has always been the heart of the heavy German industry in the Ruhr-area;
  • Bonn has been the former political centre of Germany. 

Nevertheless, the lagging behind of Berlin proves to me that this crisis is far from over yet. When the German government does not want to spur growth and prosperity in its own seat yet, but instead choses for continued austerity, this is a tell-tale signal about the still awkward state of the German economy.

And there is more: something that has definitely to do with the mini jobs and with the looming poverty in Germany. No less than 6.7 million Germans, or 8.3% of the German population have a desire for more working hours. This has been disclosed in an investigation by Destatis, concerning the year 2012.

In the year 2012, 6.7 million people (age: 15-74) wanted either to have work or to work more hours. This unused labour force potential exists of 2.3 million officially unemployed people, 1.1 million unregistered unemployeds (for instance housewifes and housekeepers, who want to have a job again or people that would like to work, but don’t have the possibility for it at this moment) and 3.3 million part-time workers, who either want more working hours or want to become full-time workers again.

Underemployment with a full-time job of at least 32 hours per week is a men’s thing: 72% of the 1.5 million full-time underemployeds is man.

From the part-time workers, 72% of the 1.8 million underemployeds is woman, exactly the opposite.

In Germany, a large and increasing number of people work in the so-called mini-jobs. These are jobs which are rewarded with not more than €400 euro per month and for which employers don’t have to pay labour tax and social security fees.

Initially, the mini jobs were either seen as a stepstone towards a full-fledged job for the unemployed or as a chance for housewifes to earn a few bucks with a part-time job, without much hassle with taxes. However, the mini-jobs are more and more turning into a poverty trap, where you can step in, but never get the chance to get out.

A few months ago, I wrote another article upon the mini-jobs:

Mini-jobs are jobs, which are rewarded with a maximum of €450 per month. These jobs are not liable for income taxes and social security premiums, but consequently offer no social security protection for the workers that have such a Mini-job. Besides that, the maximum of €450 per month is not enough for a person or household to live from. Consequently, people are usually forced to take another (mini-)job in order to avoid poverty.

This morning, there has been a discussion upon this topic on BNR business radio. Some disturbing data were mentioned during this discussion: 
  • 7.5 million workers in Germany currently have such a mini-job; 
  • Currently 25% of every new job is a mini-job;
  • 50% of every new job in the food, beverage and hospitality industry is a mini-job;
  • People with mini-jobs are often forced to take a second job to get sufficient income;
  • People with a mini-job are considered to be the new poor;
  • Only retirees seem to profit from the mini-jobs, as they can add a few bucks to their pension payments; 

Michael Moore’s shocking documentary ‘Bowling for Columbine’ gravely showed a.o. the negative consequences of the American equivalent of mini-jobs: poor people in a desperate situation, who have to work for 16 hours per day to make ends meet, thus neglecting their families and children. Children run wild and start to skip school, thus aiming at a future of joblessness, drug addiction and lurking criminality and victimship.

Workers in such jobs might get caught in a poverty trap, without having the chance of ever getting out. They probably don’t have a right for social security, they are out-of-scope for the labour agencies (‘not unemployed’) and when they get ill, someone else gets their job. It seems to be one step closer to 21st century ‘virtual’ slavery in this European race-to-the-bottom and it ultimately leads to a reduced group of ‘haves’, a small group of extremely wealthy ‘haves’ and a large group of ‘have nots’.

I cannot prove that the success of the mini-jobs has something to do with the increasing risk for poverty in areas like Berlin and Nordrhein-Westfalen, or with the steady risk for poverty in East-Germany. Therefore you could call this speculation on my behalf.

Nevertheless, I am certain that the mini-jobs phenomena adds to poverty in Germany. 

Thus the strange thing happens that Germany is one of the European champions of employment, but still seems to have increasing poverty. This is one of the nasty side-effects of the current crisis!

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