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The Illusion of Germany’s Jobs Miracle

Published in the Wall Street Journal (New York), 26 August 2016

AfAWith Britain set to leave the European Union in the next few years, pressure will mount on Germany to keep up its economic-leadership role in Europe. The country appears up to the task, especially given the labor-market reforms of a decade ago that boosted employment to unusual highs (for Europe). Probe a bit, however, and Germany is in worse shape than many may have thought.

It is easy to understand why Germany’s labor market makes for positive headlines these days. The key figures certainly look better than at the beginning of the century, when the country was often referred to as “the sick man of Europe.” In 2005, the German unemployment rate peaked at 11.7%. Some 4.9 million people were officially classified as jobless.

What has happened since then has been called the “German miracle.” As a response to the crisis, the center-left government under then-Chancellor Gerhard Schröder reformed the labor market and the welfare state. The goal was to make it harder to remain on out-of-work benefits and return those who were jobless back to the market faster. Whereas job seekers previously could claim relatively generous benefits indefinitely, Mr. Schröder’s reform meant that after one year out of work, the available benefits were reduced to a bare minimum. This increased the pressure on the unemployed to find a new job even if it didn’t match their previous salary or their qualifications. The reforms also made it possible to create marginally paid jobs by offering reduced taxes and social-security contributions for such “mini jobs.”

Thanks in large part to those reforms, the latest unemployment number is 6%, which translates to only 2.7 million people out of work—among the best for developed economies and certainly within Europe.

The problem lies in the details. To find it, dig deep into the German Federal Labor Agency’s monthly reports. All the way to the small print on page 70 of its July assessment, as it happens.

In that obscure spot, the government reveals who is counted as unemployed—and, more importantly, who is not. In this way we find out, for example, that anyone over the age of 58 who is unemployed isn’t counted by default. This is a significant difference from the normal method for counting employment in other countries, which define the working-age population as up to 65.

More conventionally, people without a job but receiving some kind of training don’t tally as unemployed either. The same goes for jobless people who are sick or those who are registered with a private recruitment agency but aren’t currently working. It isn’t unusual that these groups wouldn’t count as technically unemployed. What’s unusual in Germany is the size of these categories.

Once the over-58s and these other groups are included, the actual unemployment figure is 8%, or 3.5 million people. That is still better than it used to be, but not nearly as positive as the headlines suggest. And it gets worse.

About 15% of all employment consists of people who are only marginally employed. These so-called mini-jobs carry a maximum salary of €450 ($508) a month, not enough to meet the cost of living but high enough not to be counted as unemployed.

Similarly, shift-based hiring, or zero-hour contracts, is also increasingly popular with German companies. Though more common elsewhere, for Germany this was quite a new phenomenon. Such jobs are obviously not the most desired and secure form of employment. However, this practice still leads to a reduction in the official unemployment rate, though there are no official figures for this.

Demographics also cloud an accurate assessment of Germany’s labor market. The country’s median age now is 47 and getting older. In 2015, the the EU median was 42.4. More people are entering retirement than are joining the labor force. This means that even without creating any new jobs, the unemployment rate will automatically be reduced.

Meanwhile, the German jobs miracle has completely bypassed one significant group of would-be workers: the long-term unemployed. For the past five years, the number of people who have been unemployed for at least 12 months has remained virtually unchanged. It stands at just over one million.

Once workers reach that point, the way out tends not to involve finding a new job. According to Germany’s Federal Labor Agency, only 13% of the long-term unemployed eventually re-entered the workforce. The rest were simply declassified because they were deemed too old, too sick or in some other way unavailable to the labor market.

With all these data problems, intelligent guesswork is necessary to determine Germany’s real unemployment (or rather, underemployment) rate. It could be 10%, 12% or 15%. But it certainly isn’t the official 6% usually reported.

And the unemployment rate tells only part of the labor-market story anyway. The quality of the jobs that are being created should count as much, if not more, than the quantity. Germany hasn’t been able to increase the number of well-paid and decent full-time jobs. It has mainly managed to massage its official employment statistics by part-time and poorly paid jobs combined with changes in statistical definitions. A 2015 Bertelsmann Foundation study showed how the bottom fifth of German real wages have fallen over the past two decades.

Though it is still better to be marginally employed than completely unemployed, this isn’t what jobs miracles look like. For that to happen Germany would need a much better growth and productivity improvement than what it actually achieved. One message is that Germany’s jobs miracle isn’t currently something in which other European leaders and economists can put their faith—and won’t be without more domestic reforms in Germany.

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