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Amazing Germany’s Declining Unemployment: How Do They Do It?

Steve Hill: the government of Chancellor Angela Merkel not only pursued different economic policies than the Obama administration, but Germany also has a greater degree of economic democracy than the U.S.
Chancellor Angela Merkel

Chancellor Angela Merkel

The Wall Street Journal reported not that long ago that Germany is benefiting from its lowest unemployment in 20 years. The Organization for Economic Cooperation and Development (OECD), which uses harmonized unemployment rates (the same methodology for all countries) reports Germany’s unemployment rate at 6.7 percent (in the United States, unemployment has climbed to 9.6 percent).

What is as impressive as the low unemployment rate is that in Germany unemployment actually has declined since the start of the economic crisis, whereas in the U.S. unemployment has nearly doubled.

It used to be that U.S. pundits and economists would wag their fingers and shake their heads disapprovingly at Germany, calling it “weak,” “sclerotic,” an “old man,” and “the land of double digit unemployment.” For years, Germans and other Europeans had to withstand snide economic lectures from the Americans. But now the shoe is on the other foot: Germany, which is the world’s fourth-largest national economy and second largest exporter (perhaps the leading exporter, it’s hard to know if you can trust China’s numbers), now is leading the U.S.

Yet neither the U.S. media nor policymakers have examined closely this Deutschland miracle. It’s as if we are determined not to learn from anyone else, because if you admit you have something to learn then you also have to admit that you are not the best. And if there’s one thing that Americans like to be, it’s the best.

So how has Germany done it? How has it managed to dramatically drop its unemployment rate in the middle of the biggest economic crisis in 80 years? The answer is that the government of Chancellor Angela Merkel not only pursued different economic policies than the Obama administration, but Germany also has a greater degree of economic democracy than the U.S. Indeed, Germany has essentially reinvented the modern corporation, and yet very few Americans are aware of it. These differences have given Germany a dramatic advantage.

Kurzarbeit/Short Work
The first of these policies is called Kurzarbeit, or “short work,” in which, instead of laying off millions of German workers, firms trimmed the hours of all employees. Workers were cut back to, say, 90 percent of full-time, but would still receive 95 percent of pay with most of their lost wages being made up from a special fund squirreled away by the government during more prosperous times.

In essence, instead of the government and employers paying unemployment benefits to laid-off workers, they paid to keep workers at their jobs, but at reduced hours. It was a brilliant strategy, producing a win-win-win. For workers, having a job that has been reduced to 90 percent of full time is vastly better than being unemployed, as it keeps them engaged in the workforce and puts far more money in their pockets than if they were living on unemployment alone. For employers, it keeps the workforce intact and ready for an economic upswing. And for the government, supporting a worker whose hours are reduced is much less costly than paying full unemployment benefits.

Furthermore, with more Germans having money in their pockets, it lessened the decline in consumer spending which is one of the primary drivers of the economy. Finally, the policy prevented the utter devastation that occurs to families and communities when the primary breadwinner is laid off, along with the increase in social ills that accompany lay-offs such as home foreclosures, alcoholism, drug addiction, and domestic violence that results from the stress of unemployment.

Despite the many concrete benefits of this policy, when Larry Summers, one of Barack Obama’s closest economic advisers, was asked why the president didn’t pursue short work to stem the economic bleeding, he dismissed the idea, saying the White House wanted to create new jobs, not preserve old ones (as if there’s a conflict between the two!).

Co-determination and Economic Democracy
Beyond its short work policy to respond to the immediate economic crisis, Germany has evolved over several decades one of its greatest contributions to the global economy -- a degree of economic democracy. Institutions that are unfamiliar to Americans, with obscure names like co-determination, supervisory boards and works councils, have been crucial in helping to harness German capitalism’s tremendous wealth-creating capacity so that its prosperity could be broadly shared. This is one of the pillars of Europe’s “social capitalism” which has proven to be more stable and efficient than America’s “Wall Street capitalism.”

To understand codetermination, it’s helpful to contemplate the following questions: The corporation, even with all its considerable warts, is the greatest wealth generator that humans have ever devised, but its success raises the questions: Who gets to control that wealth? Whose pockets should the wealth flow into? Codetermination is Germany’s response, and it is a potent one.

Co-determination has several features, one of which allows workers in a corporation to elect a certain percentage of that business’ board of directors. Known as supervisory boards, they then oversee company managers, who handle day-to-day operations. In Germany, fully half of the boards of directors of the largest corporations--Siemens, BMW, Daimler, Deutsche Telekom and others -- are elected by workers.

To understand the significance of this, imagine the impact if Wal-Mart were legally required to allow its workers to elect half of its board members, who would then oversee the CEO. Imagine how much that would change Wal-Mart’s behavior toward its workers and supply chain. It’s hard for Americans even to conceive of such a notion; indeed, when I ask Americans at my lectures how many of them have heard of worker-elected supervisory boards, usually no hands go up. Yet most European nations employ some version of this as a regular feature of their economies.

The impact has been impressive. Klas Levinson, a researcher for the former National Institute for Working Life in Sweden, is one of the world’s experts on co-determination. He has studied Sweden’s codetermination extensively, where workers get to elect a third of the company’s board of directors. A few years ago I met with Levinson at the institute’s Stockholm headquarters, a sleek glass structure with the air of a university campus. “Co-determination is Europe’s little secret advantage,” he told me. “The idea that elected worker directors should sit side by side as equal decision-makers with stockholder representatives, supervising management, is a little-known yet unprecedented extension of democratic principle into the corporate sphere.”

Levinson’s research shows that employee representation on corporate supervisory boards, contrary to fears that it would cause tension or render decision-making too cumbersome, has actually fostered cooperation between management and workers. This, in turn, has benefited the businesses as well as the workers. Workers have input, even into important decisions, so companies are less plagued by labor strife and internal schisms. And workers are well compensated, with high salaries and the most generous social support systems in the world.

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One of Levinson’s studies of Swedish businesses found that two-thirds of executives viewed co-determination as “very” or “rather” positive, because it contributed to a positive climate, made board decisions “deeply rooted among the employees” and facilitated implementation of “tough decisions.” Eight of ten chairmen were satisfied with the arrangement and felt it was not important to reduce worker representation. An E.U. directive establishing a continent-wide framework for board-level employee representation went into effect in October 2004, firmly rooting supervisory boards in Europe’s economic culture.

The other pillar of Germany’s co-determination is known as works councils, which are just what the name implies -- elected councils at businesses, through which employees gain significant input into working conditions. Works councils, which are separate from labor unions but often populated by trade unionists, have real clout. They enjoy veto power over certain management decisions pertaining to treatment of employees, such as redeployment and dismissal. They also have “co-decision rights” to meet with management to discuss the firm’s finances, work and holiday schedules, work organization and other procedures.

In addition, they benefit from “consultation rights” in planning the introduction of new technologies and in mergers and layoffs, as well as in obtaining information useful in contract negotiations, such as profit and wage data. German labor law stipulates that factory-wide workers’ assemblies must be held at least four times a year, at which a management representative must report on the plant and the business. The head of the works council also reports, and workers use these assemblies to promote their views and, if necessary, criticize company decisions in front of management.

In 1994 the E.U. issued a pioneering directive on works councils, stipulating that every multinational with at least 1,000 workers, and at least 150 workers in two or more EU nations, must negotiate agreements with works councils. Other nations have supplemented that directive by requiring councils in every workplace. Studies by Princeton’s Jonas Pontusson and others have concluded that works councils contribute to efficiency by improving communication, which in turn improves the quality of decisions and legitimizes decisions in the eyes of workers. The studies also found that works councils are associated with lower absenteeism, more worker training, better handling of grievances, and smoother implementation of health and safety standards. It turns out that when workers are given a degree of consultation, it makes them more satisfied and more productive.

Co-determination has proved crucial to Europe’s economic success and its broadly distributed wealth. “The practical effect of co-determination,” says Levinson, “is that corporate managers and executives must confer extensively with employees and unions about a range of issues, even about the future direction of the company.” Co-determination reflects European social capitalism, with its communitarian values and emphasis on manufacturing, much the way huge executive bonuses, quarterly earnings and a bloated financial sector reflect America’s Wall Street capitalism.

Germany has been the most important leader in developing European-style social capitalism. That social capitalism has both produced and benefited from a broader “culture of consultation,” which has also contributed to the creation of cooperatives (like at Mondragon in Spain) and resulted in a vibrant small-business sector that produces two-thirds of European jobs, compared with only half of U.S. jobs. Indeed that culture of consultation, fostered by practices like codetermination (both works councils and worker-elected boards of directors), can take substantial credit for Chancellor Merkel agreeing to adopt Kurzarbeit/short work.

Allied Powers after WWII “Punished” Germany with Economic Democracy
Interestingly, the conquering American military in World War II can take some credit for co-determination. After the war a group of prominent German economists, led by future chancellor Ludwig Erhard, Walter Eucken and others, proposed what they called the “social market economy” in the belief that the market should serve broader social goals. And it was conservative Christian Democrats, not the leftish Social Democrats, who introduced this idea.

The Allied powers encouraged this line of thinking, since it decentralized economic power, shifting it away from the German industrialists who had supported the Nazi war effort. In effect, U.S. planners “punished” postwar Germany with economic democracy as a way of handicapping concentrated wealth and power, helping to birth the most democratic corporate governance structure the world had ever seen.

In the decades after Germany’s launch of social capitalism, co-determination spread throughout Europe; it has been adopted in most of the new E.U. member states from Central and Eastern Europe. These distinctly European advances may be the most important innovations in the world economy since the invention of the modern corporation. They encourage both free enterprise as well as a degree of economic democracy and worker consultation that does not unduly burden entrepreneurship and commerce. These advances allow businesses to be both competitive and socially responsible. Sixty years after its genesis, co-determination is a core element of the European economy, and it distinguishes Europe’s social capitalism from America’s Wall Street capitalism.

In effect, Europe, led by Germany, has reinvented the corporation. Yet the latest critiques of capitalism by leading authors like Naomi Klein, Noam Chomsky, and the producers of the popular film The Corporation tend to view all corporations and all capitalisms as the same. American progressives, while searching for effective responses to globalization, appear to be mostly unaware of these intriguing European inventions. Movements to revoke the charters of offensive corporations, while having gut-level appeal, have failed to recognize that European corporations are fundamentally different animals from their “disaster capitalism” U.S. counterparts.

When I asked a leading globalization critic from the Economic Policy Institute his opinion of co-determination and works councils, he replied dismissively, “Bah, those just lead to company unions,” a demonstrably false claim. And of course, the American right rejects co-determination as socialism incarnate, ignoring its potential to renew capitalism and support real family values.

“Mr Blair, We Still Make Things”
Another factor in Germany’s economic success has been that is has continued to emphasize manufacturing and industrial policy over the financial industry. German chancellor Angela Merkel once was asked by then-British prime minister Tony Blair what the secret was of her country’s economic success, which includes being the world’s second largest exporter and running substantial trade surpluses in recent years. She famously replied, “Mr Blair, we still make things.” Harold Meyerson, Washington Post columnist, has explained further. “In Germany, manufacturing still dominates finance…German capitalism didn’t succumb to the financialization that swept the United States and Britain in the 1980s” (though Germany’s banks and financial sector did get snared in the Wall Street web).

This focus on manufacturing, as well as on quality and long-term performance over short-term gain, is precisely what is reinforced by Germany’s codetermination. By giving workers a sizable stake in the health of companies and the economy in general, a symbiotic relationship lumps everyone into the same boat. A rising or ebbing tide affects everyone together.

Steven Hill

So when assessing the Obama administration’s performance in getting this economy going again, remember that the remarkable resilience of the German economy is directly attributable to shrewd policies and more efficient institutions that have been pursued and that have better stimulated its economy. The Obama administration also could be pursuing these policies and institutions, but it has declined to do so.

Steven Hill
New America Foundation