German skills gap costs €20bn

From the FT today:

German skills gap costs €20bn

By Bertrand Benoit in Berlin

Published: August 20 2007 19:06 | Last updated: August 20 2007 19:06

Germany’s chronic skills shortage is costing its economy up to €20bn ($27bn, £13.6bn) a year, or one percentage point of gross domestic product, according to a study commissioned by the economics ministry.

The failure of Germany’s education system to foster skills required by its fast-growing export industry could inflict “long-term damage” to Europe’s largest economy, Michael Glos, economics minister, said on Monday.

The publication, the first attempt at putting a price on Germany’s skills bottleneck, comes as the cabinet of chancellor Angela Merkel is preparing to meet at Meseberg, north of Berlin, on Thursday for its two-day mid-term conclave.

Government officials said the “grand coalition” of Christian and Social Democrats had agreed on a “national qualification offensive” aimed at addressing the skills problem.

This matched proposals unveiled by Mr Glos on Monday, including more public and private spending on education and closer co-operation between business and academia. He also urged universities to adapt to the market’s requirements and companies to hire more women, older workers and foreigners living in Germany.

The minister was cautious in advocating more immigration, however, reflecting concern among the ruling parties about the vote-losing potential of opening Germany’s tight borders.

Currently, non-EU residents who wish to work in Germany must have a yearly income of €80,000. Germany also has the toughest restrictions in the European Union on citizens from new member states.

The skills shortage has become a source of tension between business and politics. While the large industry federations have called for a relaxation of Germany’s immigration laws, politicians have accused companies of preferring cheap foreign labour over costly in-house training.

“There is no short-term solution to this problem,” said Oliver Koppel, economist a the IW Institute on the German Economy and author of the study. “The eastern European graduates who would have come a few years ago are all in the UK and the US now.”

Even there, there is little the federal government can do directly to boost university budgets since education falls within the remit of 16 state governments.

Mr Koppel’s study was based on a survey of 2,400 companies, about 85 per cent of which have returned their questionnaires. The cost of the skills shortage was calculated by multiplying the number of unfilled vacancies by a worker’s average contribution to Germany’s GDP.

Though the estimate of €20bn might appear high, he said, the figure reflected only direct costs. “There are a range of indirect costs too that we did not take into account.”

The survey showed the drought of engineers, natural scientists and programmers was acute in sectors with high research and development budgets.

Carmakers, capital goods manufacturers and electronics companies, some of Germany’s best export sectors, were among the most affected.


Berlin Cracks Immigrant Door

WSJ

BERLIN -- Germany is taking baby steps to relax its tough restrictions on immigration as growing shortages of skilled labor force many European countries to compete for migrant workers.

Complaints from businesses that they can't find enough qualified staff -- especially in the engineering sector -- are pushing Europe's largest economy to rethink its reluctance to admit foreign workers. Chancellor Angela Merkel said Friday that her cabinet had agreed to let companies hire more engineers from European Union countries in Eastern Europe.

But Germany plans to keep a lid on the number of Eastern European migrants in other sectors, maintaining restrictions that have been in place since Poland and seven other ex-communist countries joined the EU in 2004. In contrast, other established EU countries such as the United Kingdom and Ireland opened their doors to workers from the East. The influx of workers is widely judged to have boosted their economies.

Germany, like many European countries, is torn between the economic case for more immigration and an attachment to the traditional idea of an ethnically homogeneous nation-state. For years, German politicians on the left and right have assured voters that Germany wasn't a country of mass immigration -- even though the country has gone through periods of letting in millions of foreigners. Even when large numbers of Turks settled in postwar West Germany, most Germans assumed these "guest workers" would return home.

"Germany is struggling to accept the idea of diversity in society," says David Audretsch, an American who heads the Max Planck Institute of Economics in Jena, Germany. But countries that open up to people with different backgrounds and experiences are likely to fare better in the global economy than countries that try to stay homogeneous, he says.

During the 1990s, Germany had Europe's highest immigration rate, partly because it opened its doors to asylum seekers and ethnic Germans from Eastern Europe. About 13% of today's German population was born abroad -- the same proportion as in the U.S., according to the Organization for Economic Cooperation and Development.

But in recent years, immigration has slowed amid bureaucratic restrictions, while an increasing number of Germans are moving abroad. Net immigration in Germany fell to 80,000 in 2005, compared with 270,000 in 2001.

In contrast, countries including the U.K., Ireland and Spain have absorbed huge numbers of immigrants in recent years, which many economists credit with boosting growth and living standards for the native population.

Others contend competition from immigrants depresses wages of lower-skilled workers. In the past few years, much of the debate over immigration in Europe has focused on how to better integrate immigrants and their children into society. Riots in France and the U.K. and problems at German schools have highlighted social exclusion among ethnic minorities.

Terrorism by militant Islamists, including the Hamburg students who took part in the Sept. 11, 2001, attacks on the U.S., have made many Europeans mistrustful of their Muslim minorities, adding to the unpopularity of allowing more immigration.

European policy makers also must address illegal immigration. Boatloads of destitute migrants -- often smuggled by criminal gangs to Europe's Mediterranean shoreline -- are common. On the other hand, many Europeans see immigration as one of the steps needed to ease future labor shortages that will afflict Europe's aging societies, together with improving low employment rates in certain parts of the native population.

"By 2015 at the latest, our replacement needs will be bigger than our domestic supply of newly qualified workers," says Volker Treier, skills adviser at the German Chambers of Industry and Commerce.

Pressure for more immigration is compounded by an unexpectedly strong boom in German manufacturing, fueled by surging global demand for capital goods. A survey for Germany's Economics Ministry by the Cologne Institute for Economic Research found that last year German firms were unable to fill about 110,000 job vacancies for lack of qualified candidates. The study's author, Oliver Koppel, estimates the skills shortage, concentrated in engineering and information technology, cost the economy €20 billion, or about $27 billion.

Yet German Economics Minister Michael Glos, who unveiled the study last week, stopped short of calling for more immigration. Instead, the government focused on the need to train citizens better for the labor market, which Ms. Merkel said on Friday was a higher priority than immigration.

Among the members of Ms. Merkel's cabinet, only Education Minister Annette Schavan recently has called for further relaxation of immigration rules. "Improving education and strengthening immigration aren't alternatives," she said in June. "We need both."

Ms. Schavan called for Germany to relax one particularly onerous rule that German business chafes at: Firms can recruit highly skilled workers from abroad only if they pay them at least €85,000 a year. But other ministers overruled her, and last week the cabinet agreed to only one change: Beginning in November, companies hiring mechanical and electrical engineers from new EU countries in Eastern Europe will no longer have to go through a long bureaucratic process to prove there is no suitable German candidate for the job.

"Minimal steps are not enough," says Hartfrid Wolff, immigration spokesman for Germany's pro-business Free Democratic Party. Under EU law, Germany will have to drop its restrictions on East European EU citizens by 2011 at the latest -- so it might as well do so now and reap the benefits, he says.

In another measure to protect Germany against unwanted foreign intrusion, Ms. Merkel reiterated Friday that her government is working on ways to stop investors backed by foreign governments from taking over German companies in sensitive sectors -- a concern Germany has expressed in recent months against a background of the growing influence of state-backed investment funds from emerging economic powers such as Russia and China.

Germany eases restrictions on skilled workers from Eastern EU

BERLIN: In a major shift in policy, the German government announced Friday that it would ease labor restrictions for skilled workers from East European members of the EU in an effort to overcome serious shortages in its own key economic sectors.

The announcement, made by Chancellor Angela Merkel after a two-day closed session of her cabinet that set out the government's agenda for the remaining two years of its four-year term, reflects the potential crisis faced by German industry.

That industry, the world leader in exports, has repeatedly complained about the lack of skilled labor, outdated training programs, high labor costs and the falling birth rate. Universities are short of professors and other senior teaching professionals in a country where college education is largely free but hampered by undergraduate terms that last up to six years.

Merkel said the new plan would meet the concerns of industry and help to maintain Germany's competitive edge despite the immense competition coming from China.

The decision to open up the labor market to the EU's Eastern countries represents a turnaround by the German government. In 2004, just before 10 new countries from Eastern Europe were about to join the EU, Berlin imposed restrictions, lasting up to seven years, on allowing citizens from the new member states to work in Germany.

This is despite the fact that the free movement of labor is one of the fundamental rights enshrined in EU law. Germany argued at the time that a big influx of labor from the new member states would destabilize the labor market.

The reality is that German industry, hotels and services have faced immense pressure from the lower labor costs in Poland. The German Finance Ministry said there was a thriving black economy in Germany while at the same time German companies used Polish services in Poland so as to keep costs down.

The labor plan, agreed to by the coalition of conservatives and Social Democrats, means that in the short term, electrical and mechanical engineers from the East European and Balkan countries that joined the EU over the past three years will be able to start working in Germany as early as next November.

With so many skilled workers already having left Eastern Europe, however, the new measure is not expected to open the floodgates to large number of immigrants. Given the labor shortage in Germany, those who will be hired by industry here are not expected to undermine local wages.

The countries involved include the three Baltic States of Estonia, Latvia and Lithuania, as well as Poland, Slovakia, Hungary, the Czech Republic, Slovenia, Bulgaria and Romania. Malta and Cyprus are also on the list.

While the news was welcomed by German industry, experts remain skeptical that Germany would in fact have much access to skilled workers from its Eastern neighbors. A report issued last month by the Vienna Institute for International Economic Studies showed that the new member states of the EU were facing their own labor shortages.

The report said: "Lack of labor is reported for most of these countries, not only in the automotive industry in the Czech Republic and Slovakia in particular, but also in segments of the high-skilled service sector such as health care personnel, architects, civil engineers and IT experts."

The shortage of skilled labor in these countries was attributed partly to the large inflow of foreign direct investment, which has demanded more skilled labor, and also to the huge emigration of young and highly educated people to the old EU member states.

At the same time, the German government agreed to restructure the way apprentice training programs were organized so that the programs reflected the needs of industry and that they would be constantly monitored.

On another issue, the government agreed on an ambitious but controversial plan to reduce greenhouse gases by 40 percent by 2020 compared with 1990 levels. The government failed to address the future role of nuclear energy. Merkel's conservatives favor retaining nuclear power while the Social Democrats are committed to phasing out the nuclear power stations.

Merkel to Tackle Skills Shortage in Einstein's Home

Aug. 22 (Bloomberg) -- German Chancellor Angela Merkel, a physicist by training, convenes a special Cabinet meeting tomorrow to tackle a growing skills shortage in the country that spawned scientists like Albert Einstein and engineers such as Rudolf Diesel.

The issue tops the agenda for the Aug. 23-24 Cabinet conclave in Meseberg, a government retreat northeast of Berlin. With almost 100,000 engineering positions forecast to remain vacant through 2014, economists and industry leaders warn the shortfall may dash the economic upswing, not to mention derail attempts to promote Germany as the ``land of ideas.''

``We're struggling with the effects of staff shortages every day,'' said Hans-Georg Haerter, chief executive officer of ZF Friedrichshafen AG, a German maker of gearboxes for the automotive industry. The company plans to hire 250 engineers through the end of next year, though ``if we could, we'd rather take them on now,'' Haerter said.

The shortage is particularly hard-felt in Germany, Europe's biggest economy, where demand and supply are mismatched through a combination of growth near a six-year high and a stagnant birth rate. Unlike the U.K., Sweden and Ireland, Germany blocked free movement of workers from the new European Union states that joined from 2004, shutting off a supply of fresh talent. Merkel faces calls to review that position.

``We may have to open our borders if we want our companies to continue operating at full capacity,'' said Martin Wansleben, executive director of Germany's DIHK industry and trade chambers representing about 3 million companies.

Policy Planning

The issue joins climate change and steps to shield German companies from takeovers by sovereign wealth funds on tomorrow's agenda as the 16-member Cabinet draws up its policy plans for the second half of the coalition's four-year term.

Merkel's room for maneuver on skills shortages is limited by Germans' traditional concern for job security and the sensitivities arising from three state elections due in early 2008, said Oliver Koppel, a labor expert at the Cologne-based IW economic institute. Merkel's Christian Democrats and her Social Democrat coalition partners are likely to consider ``a mix of steps'' at Meseberg, he said.

They may include greater incentives for skilled foreign workers to migrate to Germany, along with better job training for apprentices and graduates and rewards for companies prepared to locate in areas with higher populations of skilled workers, Koppel said.

Tax Incentives

The DIHK is pressing for tax incentives for companies that hire research and development staff, and for lowering the annual pay threshold of 85,000 euros ($115,000) that a foreign worker must earn to be entitled to stay in Germany.

Otherwise, ``the imminent shortage of scientists could become a real problem for growth,'' DIHK chief economist Axel Nitschke said in an interview today.

``We will need foreign experts,'' Merkel said in an interview with ARD television on July 22. ``But we must also say we're prepared to take steps at home.''

The coalition faces pressure for action from Germany's biggest companies. Siemens AG, Europe's largest engineering company, awards each employee a 3,000-euro bonus for proposing a new hire at its power-plant engineering unit, where it currently lacks 600 experts. Lufthansa AG, the continent's second-largest airline, is turning away orders at its maintenance division, where aircraft systems are tested and plane body shells overhauled. It wants to hire 400 technical engineers by 2009.

`Rejecting Orders'

``We barely know how to process the workload'' with existing staff, said Bernd Habbel, spokesman for Lufthansa Technik AG. ``We're already rejecting orders.''

Each engineering post supports the equivalent of 2.3 jobs in research, development and trade, according to Eike Lehmann, head of Germany's VDI engineers' association -- positions that cannot be filled as long as the engineering vacancies persist.

The dearth of skilled staff -- most pronounced among engineers, physicists, other scientists and computer specialists -- may cost Germany's economy more than 20 billion euros this year, slicing as much as 1 percent off gross domestic product, the IW institute said in a government-commissioned study, part of which was released yesterday.

By contrast, immigration to the U.K. from new EU states such as Poland and the Czech Republic, both of which border Germany, will boost Britain's aggregate GDP by 0.67 percent in the ``medium term,'' according to a March report by the National Institute of Economic and Social Research.

Party Differences

The Social Democrats want to tackle Germany's skills shortage by scrapping restrictions keeping eastern European workers out of Germany until at least 2009 in return for the introduction of minimum pay levels -- a measure the chancellor's Christian Democrats have rejected as hostile to job creation.

Merkel's party favors targeting highly qualified foreign workers through measures such as lowering the minimum wage threshold for migrant workers, said Maria Boehmer, Merkel's envoy for immigration matters.

``Given global competition for the best minds, Germany must become more attractive for the highly qualified from abroad,'' Boehmer, a Christian Democrat lawmaker, said in an interview.

Yet with almost 3.8 million Germans unemployed, Merkel's coalition ``may shun any radical steps'' in favor of incremental changes to immigration rules, said Uwe Andersen, a professor of political science at the University of Bochum in western Germany.

``Ultimately, immigration matters are highly sensitive,'' Andersen said, meaning it's likely the issue is ``tackled in small rather than big steps.''