NCPA - National Center for Policy Analysis

Jobless In Germany

February 19, 1997

German unemployment soared to a record 4.66 million in January, or 12.2 percent -- the highest since 1933. And a constitutionally sanctioned wage-setting cartel guarantees that unemployment in Germany will continue to remain high. The pact between unions and businesses rules out any possibility of reducing costs by cutting workers' pay scales.

  • The pact leaves cost-conscious companies no option other than laying off workers, moving production abroad or bringing in more automation.
  • Massive layoffs have become almost common in Germany's largest industrial groups -- including chemicals, electronics and engineering -- all based on accords made with the knowledge and consent of the unions.

Chancellor Helmut Kohl has tried jawboning the unions to "go easy" and perhaps forgo a real wage increase, but he and his party have made no move to change the system. They have cut worker sick pay from 100 percent to 80 percent and exempted companies with 10 or fewer workers from strict laws on layoffs. Also, tax reform to be implemented by 1999 would reduce top marginal income and corporate tax rates down to 39 percent and 35 percent respectively -- a move Kohl's supporters hope will boost investment.

Free-market advocates hope that market forces will eventually break the wage cartel. They point to evidence that companies and workers in eastern Germany are leaving unions and employer groups, and that similar movements are beginning in western Germany.

Thomas Mayer, senior economist at Goldman Sachs International, observes that, "All cartels... begin to crumble when they overreach market prices."

Source: Matt Marshall, "How Germany's Wage Cartel Pares Jobs," Wall Street Journal, February 19, 1997.


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