Focus on Germany London Office The Chandlery Office 609 50 Westminster Bridge Road GB London SE1 7QY Tel 00 44 20 77 21 87 45 Fax 00 44 20 77 21 87 46 www.feslondon.org.uk March 2007 The low wage debate in Germany: are there ways out of the poverty trap? Germany is debating how to restructure its low-wage sector. Yet, no­body should expect employment miracles from these reforms; they are more about making German society more decent and just. Not even the best labour-market reforms can replace a proactive employment policy. Michael Dauderstädt For many years, Germany has seen an in­crease not only of long-term unemploy­ment, predominantly amongst those with low skill levels, but also of the extent of low­wage employment. The idea of the social state enshrined in Germany’s constitution as well as economic reason call for em­ployment and labour-market policies that combine the wise utilization of the employ­ment potential with decent wages and sala­ries. Full employment through wage dispersion? Lasting mass unemployment is obviously the core economic and social problem in Germany. Neoclassical economics used to offer a simple diagnosis and therapy whereby unemployment happens if and when there is a gap between the wage ex­Michael Dauderstädt is Director of the FES Division for Economic and Social Policy. He wishes to thank the department for economic and social policy at FES as well as the Speakers of the “Kocherler Kreis” from the 5 th -7 th January 2007, whose lectures and contributions have influenced and enriched this paper. pectations of the unemployed and the pro­ductivity expectations of the employers, i.e. if and when the claimed wages are too high, whereas the envisaged productivity is too low, primarily as a result of low or out­dated qualifications. The solution would be – so the neoclassical approach implies – lower wages and, at the very best, qualifica­tion updates to be achieved in the medium­term. These theoretical explanations were often underpinned empirically by references to the USA and Great Britain where the wage dispersion is said to be higher and therefore unemployment lower, whereas in Germany the wage dispersion is lower, but unemployment higher, as a consequence of high standards of social security and strong trade unions. As plausible as this simplistic explanation appears to be at first glance, upon more thorough examination the underlying theo­retical assumptions and the empirically measurable facts turn out to be deficient. A worker’s productivity is largely dependent on demand. Physical productivity(out­put/working hours) depends on the capital stock used, with any investment only being worthwhile if there is sufficient demand. The decisive monetary productivity(added value/working hours) depends on the prices