Economics, International economy, Pethokoukis, U.S. Economy

Cheap labor and greater exports: Does the German model provide a blueprint for US economic renewal?


A decade ago, Germany’s economy was floundering and uncompetitive. A key factor in its turnaround was this labor market bargain:

Unions and employers agreed wage restraint in return for job security and growth. Flexible working practices and government-subsidized reduced working hours enabled employers to adjust to the economic cycle without hiring and firing. From 2005, joblessness started to fall and is nearing pre-reunification levels. Elsewhere in Europe, governments tackling high unemployment are playing catch-up, making labor reforms the number one priority.

A less expensive and more flexible domestic labor market greatly helped German exporters, which helped economic growth. Exports as a share of GDP rose from a quarter to half. Can the combo of restrained labor costs and lower energy costs, both boosting manufacturing exports, help the US economy, too? Maybe so. From the WSJ:

Boston Consulting Group—a leading proponent of the idea that U.S. manufacturing will come roaring back—predicts a surge in U.S. exports, partly helped by lower energy costs and stagnating wages. In a report for release Tuesday, BCG says rising exports and “reshoring” of production to the U.S. from China “could create 2.5 million to five million American factory and service jobs associated with increased manufacturing” by 2020. That, BCG says, could reduce the unemployment rate, currently 7.4%, by as much as two to three percentage points.

AEI’s Kevin Hassett noted back in 2009 that for about $11 billion a year the US could copy Germany’s “Kurzarbeit” program, which encourages companies facing a temporary demand decline to cut hours instead of positions. If hours and wages are reduced by 10% or more, the government pays workers 60% of their lost salary. If such a program had been in place here, US unemployment, particularly long-term unemployment, would not have surged so high and would be lower. One current policy implication would be to provide employers with tax incentives to employ the long term unemployed. Hassett:

If somebody’s 40 years old, and not employed for 25 years, that costs governments lots of money, and if we think rationally about reducing spending, maybe it’s worth it to pay for their first year at a private employer. Direct hiring, or a direct subsidy for hiring, could save taxpayers a fortune.

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