German Labor Market Reforms

Darrell Hougen

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This seems like an under-reported story. People who pay attention to markets know that the German economy has been doing well. The question is why? I don't know much about the issue, but I stumbled across this today:

Germany’s export engine really took off with its labor market reforms of a decade ago. Germany became increasingly competitive–wages in real terms are below where they were at the start of the 1990s, while real GDP per capita has increased by a quarter over the same period. The result was plunging German unemployment–down from 11% half way through the last decade to around 5.5% now, a multi-decade low.

The unemployment numbers illustrate the positive impact of allowing wages to fall to market levels. Of course, in a booming economy with a low unemployment rate, one would expect wages to begin moving up as worker shortages become a problem for highly profitable businesses. They'll have to compete with each other for employees.

Anyway, I don't know much about the actual reforms, so I would welcome any comments shedding light on the subject. Any analyses pointing to which reforms have led to decreased unemployment would be interesting.


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