Unemployment and its Causes
By Christian Steffen
The ideological range of the political debate around the issue of mass unemployment is very broad. Diagnosis and proposed therapy vary from a ostensibly perceived fundamental crisis of capitalism and a need of containment to the strengthening of consumer purchasing power, from supply side economics to the demand to unleash the powers of unconstrained capitalism. Without going into greater detail at this point one can say that every relevant political actor in Germany regards the deterioration of the labor market and related problems as the central, most pressing challenge to society and the political system. The author shares this assessment for the social and the monetary cost of unemployment have reached a degree where it threatens to destabilize the entire socio-economic system or is already doing so to some extend.The focus of this paper is an attempt to point out a possible way out of the current misery; point of departure has to be a thorough analysis of the underlying causes of mass unemployment. Only if these are isolated possible counter measures, tailor made for the specific problem, can be proposed. Due to the shortness of this paper I will restrict myself to sketch out what can be termed as new guidelines for fighting unemployment rather than going into great detail.
Globalization and a structural/technological change are the two megatrends that will determine the policy options available in the future. The new dogma of the world economy is the principle of free trade; according to theory the unconstrained exchange of goods and the international division of labor leads to optimal results for all parties involved. To ensure this new freedom a variety of treaties have been signed and the World Trade Organization was founded to monitor compliance; it seems to be a safe assumption that this trend is irreversible.
Globalization though quite drastically changed the nature of the national economies; a variety of accelerating developments occurred that would shape and alter the entire structure of the way business is done. Domestic markets were opened for foreign goods, international competition stiffened (e.g. through the emerging markets in southeast Asia or eastern Europe) and measures were taken on the level of the individual company or employer to combat the threat of falling behind in these rough waters. Many products that do not belong to the sector of high technology and are labor intensive cannot be produced in Germany under competitive conditions due to the high costs of labor. For example the demise of the steel industry is largely a result of stiff competition on the world market where German companies find it harder and harder to offer competitive prices. In order to offset the high costs of labor, more and more companies move their production sites to low labor costs countries, or, even worse for the job market, invest their money in capital or currency speculations that promise a better yield. This development becomes clear, when one takes a closer look at the overall figures of direct foreign investment. Germany, it seems, is not regarded as a country worth investing in; on the other hand German companies make use of the wage differences and utilize foreign investment to a great extend. The possible impact of this transfer of capital can be seen in the case of Ireland; the sustained growth it has experienced in the last decade is largely induced by foreign capital. In Germany on the other hand there seems to be a push-pull effect (high costs in Germany, low costs abroad) at work that results in the abolishment of labor intensive, unskilled work.
The argument from above is in part deceiving though. Labor intensive and unskilled are the words that need to be stressed in this context; the current situation looks quite different when the object of attention is the high technology sector which requires a lot of know-how, expertise and the right mix of accompanying conditions. Especially the very favorable infrastructure and the availability of highly skilled personal contribute to the fact that the Germany is still a country where large profits can be made. In order to benefit from potential job openings in profitable industries or companies the individual needs to be equipped with the right mix of skills, a problem that will be addressed later.
The second trend I have already mentioned (which is more or less a result of the economic globalization) is the structural/technological changes. Many of the classical industries shrank considerably in size while, at the same time, in the newly emerging high-technology companies offered jobs that were too few in number and too demanding in regard to skills and qualifications. Of course it is possible to some degree to close the gap between qualifications and demand via vocational education programs; closing this mismatch though would still be insufficient to deal with the problem of mass unemployment. When the total figures of job openings and unemployed people are compared it becomes quite clear that the number of jobs available is simply too small. Furthermore vocational training does not create jobs but rather helps to close already existing openings in the job market. Even if suitable persons for all openings were found the number of the unemployed would still remain on a high level. The only possible solution is therefore the creation of new jobs, a problem I will address later.
Since labor is expansive in Germany a high pressure to automate production to the utmost possible degree evolved. One important reason why many German companies are doing well is that the modernization pressure was extremely strong; the measures taken (that is replacing costly employees with inexpensive machines or computers) resulted in lower costs per unit, increased competitiveness and a more persons unemployed. A look at the metal processing industry in Baden-Württemberg underscores the argument from above. During the last few years this sector witnessed a steady increase in productivity while, at the same time, the number of workers in this industry decreased. Another example is the manufacturing of electronic devices such as cellular phones. In a modern production plant the labor costs only amount to a meager 3% of the overall costs; it is quite obvious what this means for the labor absorption capability. On a more abstract level the following can be said. Productivity grew faster than the overall economic growth, the total demand of working hours can be met by less people. This jobless growth marks a turning point in the history of capitalism; the positive correlation between the increase of the GNP and the situation on the job market seems to be at best less strong than it used to be. Growth remains to be a very important condition for the creation of jobs, but in order to achieve tangible results the economy needs to grow at a faster pace than the overall productivity. For the immediate future a growth rate of 2 - 2.5% seems to be a safe assumption; under the given circumstances this moderate growth can at best put an halt to the deterioration of the labor market.
If the reasoning up to this point is reduced to the major feature the conclusion that needs to be drawn is that labor is expansive in Germany, in some respect, depending on the kind of labor, even too expansive. Only know-how, expertise and superior quality can compensate for the high costs of labor; in areas where this is not the case more jobs will vanish. In the foreseeable future countries like Poland or the Czech Republic will continue to undercut German prices; the significantly lower wages offer an competitive advantage that is hard to overcome. Furthermore countries like the Czech Republic are catching up to the EU states in regard to technical capabilities, a tendency that becomes visible when looked at the car industry. What this means is that jobs that have formerly been considered rather safe increasingly become the target of downsizing, outsourcing or are being moved across the border. In order to make this development more graphic one has to leave the macroeconomic level and scrutinize the situation of the individual. A close look at the unemployment statistics reveals, that there is a strong correlation between education and the employment situation. Not only does a sound education (University degree or equivalent; extensive training on the job via the dual education) lead to more income, it also enhances the chances of finding a job in the first place. Put simply, a solid educational background is the best insurance against unemployment; the more acquired skills the individual can offer, the better the chance to meet the requirements of the complex labor world. In the secondary as well as in the tertiary sector qualifications are the single most important asset when hunting for a job; persons that, without being condescending, have little to offer are more likely to encounter serious difficulties. Of course this also means that the individual can to some extend prepare himself/herself for the job market of the future in order to avoid the classical mismatch situation which occurs, when individual qualifications and the demands of the available jobs do not match. Globalization, structural/technological change, and qualifications have drastically changed the national economies in respect to the labor markets; the question that needs to be addressed now is how to ease the plight of mass unemployment in Germany or how to foster job creation.
The most commonly recommended remedy is an adaptation of the policies and mechanisms of the US, the Netherlands and New Zealand. This model is based on the following reasoning. If labor is too expansive and too inflexible no entrepreneur will hire additional staff; if investments become necessary, machinery is being purchased. In case there is demand for a workload that cannot be handled by the employees during their regular hours, overtime is being done instead of hiring personal that cannot be disposed off, when the temporary boom is over. The lesson drawn from this is that labor contracts need to allow for flexibility and a higher inequality of wages, custom fit for the specific economic circumstances. In addition the three countries listed above ratified alterations of the social security and welfare systems. Evidence gathered seemed to indicate that the policies of a typical welfare state have contributed to high unemployment rates. The underlying reasoning is that if the difference in total income between receiving social entitlements and the salary of a low paying job is too little to provide a strong enough incentive to actively seek employment. In other words, the difference has to be tangible or it proves to cause unintended consequences (also: a high percentage of the income is withheld to finance the system which further increases the costs of labor). In order to provide a work incentive two strategies were pursued. Either the acceptance of a low paying job was made a precondition for becoming eligible for social assistance (negative incentive) or working is rewarded via income supplements such as free health care, family support or other benefits (positive incentive).
An increase in the differences of work compensation (flexible wages), labor contracts that allow for swifter reactions to the ups and downs of the market (flexible contracts) and a reform of the social security systems towards more self responsibility were the mechanisms applied in the countries mentioned above; the unemployment rate is indeed significantly lower than for instance in Germany (~ 6% in the Netherlands). Needless to say that an approach like this is controversial; social inequality among the working people is a inherent side effect and the reproach, that a working poor class will emerge, cannot be dismissed offhand. But there is also evidence that supports the approach from above. In regard to the situation in Germany some authors note that the society is in danger of falling prey to an insider/outsider phenomena. People that do have a job make pretty good money and enjoy a high degree of job security, two very desirable conditions, but at the same time these conditions prove to be a persistent obstacle when it comes to people seeking employment. In other words, a trade off between the fortunate situation of the insiders (people with a job) and the hardship of the outsiders is constructed that very well needs to be acknowledged. What we face at this point is a debate of a rather ideological nature; the issue resolves around the following question.
Is it desirable to achieve a reduction in the unemployment figures via the means of cutting social entitlements and the creation of a low paying, highly flexible job sector? In other words, what constitutes to more social injustice, wage inequality among the working people or 4 million people unemployed?
The author of this essay is of the opinion that some of the measures proposed above are worth thinking about in the discussion on how to fight unemployment; it would be unwise to reject them straightaway. One has to keep in mind that the overall goal is not the abolishment of a strong social component of our market economy but rather the rescue of it. A tangible reduction in unemployment figures, which did occur in the countries above, actually increases the management capabilities of the state. An enormous amount of money can be channeled from supporting the unemployed to measures of active assistance such as job training, family assistance, free public health care and other social programs. In addition the experience from the Netherlands seems to suggest that the so called entry level jobs in many cases lead to a more permanent position, in a sense these jobs are a stepping stone towards a new professional life.
In the long run though, the high standard of living in Germany can only be maintained if the transition to a modern, high-technology, service oriented country is successfully completed. What we need in this context are sincere efforts in the fields of education, research and development, a tax reform, more venture capital and business initiatives and a reform of our social security system. The measures advocated above might not find universal approval. If there is a less painful way to reintegrate the unemployed into the labor market, let me know.
Selected Sources:
Rebecca Blank: Is there a Trade-off between Unemployment and Inequality?; 1997.
Fazil Mihlar and Michael Walker: The tragedy of unemployment; 1997.
Herbert Giersch: Arbeitslosigkeit in Deutschland: Was geht sie uns an?;1998.
National Association of Temporary and Staffing Services: Flexible Employment: Positive Work Strategies for the 21st Century; 1996.
Hans-Joachim Stadermann: Arbeitslosigkeit im Wohlfahrtsstaat; 1998.