Saturday, July 14, 2007

The Financial Times on Germany 12

The Financial Times on Germany 12

A temporary solution? Germany's labour market develops a second tier

By Bertrand Benoit in Berlin, Financial Times
Published: Oct 27, 2006

Martina Metsch is a 34-year-old Berlin-based architect whose career illustrates one of the biggest dilemmas facing Germany today, as the forces of globalisation reshape its highly regulated job market.

Ten years ago, anyone with Ms Metsch's qualifications would have had little trouble landing a full-time employment contract. Yet since graduating in 2001 she has changed jobs nine times, alternating between internships, fixed-term contracts and self-employment. Stable, secure work, she says, "is a distant dream".

She is one of a rapidly growing number of Germans who have become exceptions to the rule in a country famous for its tough labour laws and support for the rights of workers. More and more of her fellow citizens are finding the search for full-time, permanent employment a fruitless quest. Those dubbed "atypical workers" in the jargon of economists are becoming the norm.

There is still plenty of evidence to support the view that Germany's problems stem from its rigid labour market. A recent World Bank survey, for example, ranked the country 129th out of 175 on the ease of employing workers. But beside the market for full-time, permanent jobs, a new one characterised by flexibility and low costs has emerged and is fast upstaging the former.

The changes have been brought about by global competition, new legislation and the pressure of high unemployment: "Germany is definitely a two-tier labour market now," says Kai Deininger at the German arm of Monster, the online job exchange. "This is particularly true for first-time jobseekers, regardless of their qualifications."

For German companies this is good news. The steady rise in employment registered since the beginning of the year shows that the labour market's increased flexibility is having a positive effect. Over the short term, it means the robust recovery currently under way should generate more jobs than previous economic rebounds.

Yet this change also threatens to reshape the German welfare state and undermine social cohesion. And for workers, the benefits are ambiguous: more jobs, but worse jobs.

One way to describe Germany's changing labour market would be as a railway train with two classes (and 36.5m people) on board. The first-class carriages represent the traditional labour market. Those with a premium ticket enjoy full-time employment, extensive legal protection against dismissal and relatively high pay. While they contribute fully to the social security system, they are entitled to generous health and pension benefits.

For decades, this was the world the majority of German workers inhabited. Sector-wide wage agreements struck at regular intervals between business federations and trade unions often provided better working conditions than those guaranteed by law.

In recent years, however, the structure of the job market has changed radically. The "first-class" cabins on the train have become more exclusive while an ever larger number of second-class carriages have been added to the train. In these Spartan coaches, one is easily hired and easily fired; pay tends to be low - at times far below even the UK's modest minimum wage; contracts are struck for fixed periods; part-time work and self-employment are widespread; paid holidays are not always provided and Christmas bonuses unheard of.

Such "split" job markets exist in other European economies but the rise of "atypical" employment that Germany has witnessed is without equivalent. Government figures show that German businesses shed well over 1m "first-class" jobs between March 2002 and May 2006, as the economy slowly emerged from stagnation. In the same period, they created almost exactly the same number of second class jobs.

While "first-class" positions accounted for 65 per cent of all the jobs in the economy in 1968, this substitution means they now make up less than half of the total. In the stagnation of 2000-04, companies achieved "unprecedented flexibility in shaping their work-force", says Jan Kuhnert, head of Loquenz, a management consultancy. "What you see happening is the transformation of the institutional relationship between employer and employee into a service relationship."

German trade unionists are growing uneasy about the social implications of this shift. "What worries us," says Johannes Jakob, head of the labour market policy unit at the DGB trade union federation, "is not the existence of two labour markets but the fact that it is becoming increasingly difficult for workers to pass from one to the other".

This cleaving of Germany's labour market was made possible largely by changes in the law: under pressure after unemployment rose to a postwar high, the then government of Chancellor Gerhard Schröder ushered through a series of reforms in 2003 introducing incentives for the long-term unemployed to seek work and for companies to hire low-paid workers part-time. It also made it easier to employ temporary workers and offer fixed-term contracts and it eased dismissal protection.

One effect of these reforms, says Klaus Abberger of the Ifo economic institute, was to allow companies to "outsource" the risks and additional costs inherent in Germany's tough employment protection laws.

Freed from their regulatory shackles, temping agencies recorded a boom after 2003. In the following two years, while Germany's labour market as a whole was shrinking, the number of temporary workers shot up from 752,532 to nearly 1m.

"Companies face tough competition and rising volatility. They need this flexibility," says Volker Enkerts, chairman of Flextime, a Hamburg-based temporary work agency. "These changes you see on the labour market are a by-product of globalisation."

German companies - used to adapting to changes in demand by modifying the lengths of shifts - now favour the "external" flexibility provided by temporary workers, freelancers and fixed-term contracts. Airbus, the troubled aircraft maker, for instance, said last week it would start its restructuring by shedding 1,000 temporary workers out of the 7,300 it employs in Germany, who make up more than one-third of its workforce in the country.

"Mounting international competition means companies can no longer afford the extra costs of maintaining a permanent overcapacity in order to smooth out short-term variations in demand," says Markus Promberger of the IAB institute, part of the Labour Agency.

For Stefan Bielmeier, an economist at Deutsche Bank, the two-tier structure is clearly visible at company level: "Companies are increasingly sticking to a core staff where most of their knowhow is concentrated and which they carry through the cycle. Next to this is a layer of atypical workers that fluctuates in response to changes in the business cycle."

The widening gulf between labour-market "insiders" and "outsiders", however, is fuelling concern about the social and even the macro-economic consequences. The Organisation for Economic Co-operation and Development last month warned the government against a deregulation policy focused exclusively on low-qualified and marginal groups. "Single-sided deregulation of employment protection law in favour of highly protected regular employment contracts," the organisation wrote, "risks creating a dual labour market with an increasing share of marginal or unstable jobs."

Stagnating wages, it said, could in addition undermine the financial stability of the social security system, which is funded through levies on employers and employees calculated as a percentage of gross wages.

Part-time contracts now account for 24 per cent of all jobs, double the level of 1991. Likewise, the proportion of low-paid jobs, which are partly or wholly exempted from social security contributions, rose from 2.4 per cent in 1985 to 17.4 per cent last July.

Polls by the Federal Statistical Office put the number of workers on fixed-term contracts (of six months to two years) at 3.2 per cent of the total in 1985, 10.8 per cent in 1991 and 14 per cent last year. In the 15-to-30 age bracket, they now make up 42 per cent of all jobs.

Experts worry that Germany's incomplete liberalisation of its labour market could undermine the traditional relationship between higher employment and higher consumption, an unwelcome development since consumer spending remains the Achilles heel of the German economy. "If this boom reflects mainly an increase in temporary contracts, you must wonder whether people on such contracts will have a lower propensity to consume their income than others," says Elga Bartsch, economist at Morgan Stanley.

Looking further into the future, Deutsche Bank warned last month that disparities between the two labour markets could erode the skills of "second-class" travellers in the medium term. "If participants in the secondary labour market do not get a chance to increase their skill levels such that they eventually meet the requirements in the primary market, where jobs are to a greater extent exposed to international competition, jobs in the latter may simply disappear."

With Germany going through a phase of reform fatigue and falling unemployment eating away at politicians' appetite for further deregulation, the likelihood of new reforms that would lower the barrier between first- and second-class workers seems low.

The sceptics may be wrong to dismiss Germany's labour market as crippled by rigidity. But they may be confirmed in their pessimism, if not their analysis, if the country's leaders fail to finish the work they have started.

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