Adjusting Badly the German Welfare State, Structural Change, and the Open Economy

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Abstract
Germany was comparatively successful in weathering the macroeconomic crises of the 1970s and early 1980s, and its industrial sector remained highly competitive throughout. Nevertheless, unemployment has been high and is still rising. The impact of unification is only a part of the explanation. Instead, the very formula for Germany's past success is also the key to its current problems. Cooperative labour relations, on which German international competitiveness depends, were maintained by using the welfare state's generous exit options from the labour market for older and less productive workers. Given the prevailing mode of financing the “Bismarckian” welfare state, however, the resulting rise of social security contributions added to the costs of labour throughout the economy. As the government relied on the same solution in coping with the massive employment losses in East Germany after unification, non‐wage labour costs have risen to a level that can be sustained only by highly productive types of work. This constrains the growth of private services that have compensated industrial job losses in other countries.

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