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From Sick Man of Europe to Economic Superstar: Germany’S Resurgent Economy†

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From Sick Man of Europe to Economic Superstar: Germany’S Resurgent Economy† Journal of Economic Perspectives—Volume 28, Number 1—Winter 2014—Pages 167–188 From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy† Christian Dustmann, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener n the late 1990s and into the early 2000s, Germany was often called “the sick man of Europe” (for example, Economist 2004), a phrase usually attributed I to comments by Czar Nicholas I of Russia about the troubles faced by the Ottoman Empire in the mid-19th century. Indeed, Germany’s economic growth averaged only about 1.2 percent per year from 1998 to 2005, including a recession in 2003, and unemployment rates rose from 9.2 percent in 1998 to 11.1 percent in 2005 (according to World Bank data). Today, after the Great Recession, Germany is described as an “economic superstar” (for example, in the movie “Made in Germany: Europe’s Economic Superstar,” http://fi lms.com/ItemDetails.aspx?TitleId=29218). lms.com/ItemDetails.aspx?TitleId=29218). Germany’s number of total unemployed fell from 5 million in 2005 to about 3 million in 2008, and its unemployment rate had declined to 7.7 percent in 2010 (according to data from Germany’s Federal Employment Agency, the Bundesagentur für Arbeit). In contrast to most of its European neighbors and the United States, Germany experienced almost no increase in unemployment during the Great Recession, despite a sharp decline in GDP in 2008 and 2009 (an episode discussed ■ Christian Dustmann is Professor of Economics, University College London, London, United Kingdom. Bernd Fitzenberger is Professor of Statistics and Econometrics, Univer- sity of Freiburg, Freiburg, Germany. Uta Schönberg is Associate Professor of Economics, University College London, London, United Kingdom. Alexandra Spitz-Oener is Professor of Economics, Humboldt University Berlin, Berlin, Germany. Fitzenberger is also Research Associate at ZEW Mannheim, and Schönberg and Spitz-Oener are also Research Associ- ates at the IAB, Nuremberg, Germany. Their email addresses are [email protected], bernd.fi [email protected],[email protected], [email protected],[email protected], andand alexandra.spitz-oeneralexandra.spitz-oener @wiwi.hu-berlin.de. † To access the Appendix, visit http://dx.doi.org/10.1257/jep.28.1.167 doi=10.1257/jep.28.1.167 168 Journal of Economic Perspectives iinn MMölleröller 22010; 010; B Burdaurda aandnd HHuntunt 22011).011). GGermany’sermany’s eexportsxports rreachedeached aann aall-timell-time rrecordecord ooff $$1.738 trillion1.738 trillion iinn 22011,011, wwhichhich iiss rroughlyoughly eequalqual toto hhalfalf ofof GGermany’sermany’s GDP,GDP, oorr 77.7 percent.7 percent ooff wworldorld eexports.xports. EEvenven tthehe eeurouro ccrisisrisis sseemseems nnotot ttoo hhaveave bbeeneen aableble ttoo sstoptop GGermany’sermany’s sstrengtheningtrengthening eeconomyconomy aandnd eemployment.mployment. HHowow ddidid GGermany,ermany, wwithith tthehe ffourth-largestourth-largest GGDPDP inin thethe worldworld (after(after thethe UnitedUnited SStates,tates, China,China, aandnd JJapan)apan) ttransformransform itselfitself ffromrom ““thethe ssickick manman ooff EEurope”urope” ttoo anan ““economiceconomic ssuperstar”uperstar” iinn llessess tthanhan a ddecade?ecade? OOnene ccommonommon aanswernswer ppointsoints ttoo a sserieseries ooff llegislativeegislative llaborabor mmarketarket rreformseforms tthathat sstartedtarted iinn tthehe mmidid 22000s,000s, tthehe sso-calledo-called ““HartzHartz rreforms.”eforms.” AAnothernother eexplanationxplanation ffocusesocuses oonn tthehe eevolutionvolution ooff GGermany’sermany’s eeconomyconomy aandnd ttraderade balancebalance iinn thethe ccontextontext ofof thethe eurozone.eurozone. However,However, wewe willwill argueargue thatthat thesethese ffactorsactors ddidid nnotot pplaylay a ddecisiveecisive rolerole fforor thethe ttransformationransformation ofof thethe GermanGerman economy,economy, nnamelyamely tthehe rrestructuringestructuring ooff iitsts llaborabor mmarketarket aandnd tthehe iincreasencrease inin competitivenesscompetitiveness tthathat hhasas hhelpedelped GGermanerman eexports.xports. WWee iinsteadnstead ppresentresent evidenceevidence tthathat thethe specifispecifi c ggovernanceovernance sstructuretructure ooff thethe GermanGerman llaborabor mmarketarket iinstitutionsnstitutions aallowedllowed themthem toto rreacteact fl exiblyexibly iinn a ttimeime ofof eextraordinaryxtraordinary economiceconomic circumstances,circumstances, andand thatthat thisthis ddistinctiveistinctive characteristiccharacteristic ooff itsits llaborabor mmarketarket institutionsinstitutions hhasas beenbeen tthehe mmainain reasonreason fforor GGermany’sermany’s eeconomicconomic ssuccessuccess ooverver tthehe llastast ddecade.ecade.1 WWee bbeginegin bbyy aarguingrguing thatthat thethe eevolutionvolution ofof Germany’sGermany’s perper unitunit laborlabor costs—thatcosts—that iis,s, llaborabor ccostsosts rrelativeelative ttoo pproductivity—inroductivity—in bbothoth tthehe mmanufacturinganufacturing ssectorector aandnd tthehe ootherther ssectorsectors iinn tthehe eeconomyconomy hhasas pplayedlayed aann iimportantmportant rroleole iinn tthehe ffavorableavorable eevolutionvolution ooff GGermanerman ttradableradable manufacturingmanufacturing industry.industry. WWee tthenhen iinvestigatenvestigate tthehe mechanismsmechanisms tthathat aallowedllowed fforor wwageage rrestraintsestraints aandnd tthehe ddramaticramatic ddecreaseecrease iinn rrealeal wwagesages aatt tthehe llowerower eendnd ooff tthehe wwageage ddistribution.istribution. TThehe sspecifipecifi c ffeatureeature ooff tthehe GGermanerman ssystemystem ooff iindustrialndustrial rrelationselations tthathat wwee sstresstress iiss tthathat iitt iiss notnot rrootedooted iinn legislation,legislation, bbutut insteadinstead iiss llaidaid outout iinn contractscontracts aandnd mmutualutual aagreementsgreements bbetweenetween tthehe tthree mainhree main aactorsctors iinn GGermany:ermany: eemployermployer aassociations,ssociations, ttraderade uunions,nions, aandnd wworksorks ccouncils.ouncils. TThehe iinstitutionalnstitutional ssetupetup ooff tthishis ssystem,ystem, wwhichhich iiss ddominatedominated bbyy iindustry-widendustry-wide wwageage bbargaining,argaining, rremainedemained bbasicallyasically uunchanged.nchanged. HHowever,owever, mmanyany iindi-ndi- ccatorsators ddemonstrateemonstrate tthathat iitt ddidid cchangehange iinn tthehe wwayay iitt ooperates.perates. FForor eexample,xample, tthehe ssharehare ooff GGermanerman wworkersorkers ccoveredovered bbyy aanyny kkindind ooff uunionnion aagreementgreement hhasas ssharplyharply ddeclined,eclined, aandnd tthehe nnumberumber ooff fi rrm-levelm-level ddeviationseviations ffromrom iindustry-widendustry-wide uunionnion aagreementsgreements hhasas ssharplyharply iincreasedncreased ssinceince tthehe mmidid 11990s.990s. OOverall,verall, tthesehese ggradualradual cchangeshanges wwithinithin tthehe ssystemystem lleded ttoo aann uunprecedentednprecedented ddecentralizationecentralization ooff tthehe wwage-settingage-setting pprocessrocess ffromrom tthehe iindustryndustry llevelevel ttoo tthehe fi rrmm llevel.evel. AAlternatively,lternatively, oonene mmayay rreferefer ttoo tthishis pprocessrocess aass aann iincreasingncreasing llocalizationocalization ooff GGermany’sermany’s iindustrialndustrial rrelations.elations. TThehe ddecentralizationecentralization iinn wwageage settingsetting iinn GGermanyermany isis inin ccontrastontrast toto manymany ooff itsits nneighborseighbors wherewhere tthehe sstatutorytatutory minimumminimum wwageage iiss oftenoften hhighigh (relative(relative toto produc-produc- ttivity),ivity), wwherehere uunionnion wwagesages aandnd wworkork hhourour rregulationsegulations aapplypply ttoo aallll fi rmsrms inin thethe 1 Our argument is similar in spirit to that of Carlin and Soskice (2008, 2009), who argue that it is restruc- turing by Germany’s private sector, using traditional German institutions based on employer-worker cooperation, and not government labor market and welfare state reforms that are to be credited for the German recovery. Christian Dustmann, Bernd Fitzenberger, Uta Schönberg, and Alexandra Spitz-Oener 169 iindustry,ndustry, aandnd wherewhere iinstitutionalnstitutional changechange tthereforeherefore requiresrequires broadbroad consensusconsensus alongalong tthehe ppolitical spectrum.olitical spectrum. WWee tthenhen tturnurn ttoo a ddiscussioniscussion ooff whywhy GGermany’sermany’s laborlabor marketmarket experienceexperience hashas bbeeneen ssoo ddistinctiveistinctive wwithinithin ccontinentalontinental Europe.Europe. OOnn tthehe oneone sside,ide, tthehe ffallall ooff tthehe BBerlinerlin WWallall iinn 11989989 aandnd tthehe dramaticdramatic costcost ooff rreunifieunifi cationcation burdenedburdened thethe GermanGerman economyeconomy iinn aann uunprecedentednprecedented wway,ay, leadingleading ttoo a pprolongedrolonged pperioderiod ooff dismaldismal macroeconomicmacroeconomic pperformance.erformance. OOnn tthehe ootherther sside,ide, iitt ggaveave GGermanerman eemployersmployers aaccessccess ttoo nneighboringeighboring EEastast EEuropeanuropean ccountriesountries tthathat wwereere fformerlyormerly llockedocked aawayway bbehindehind thethe IIronron CCurtain,urtain, aandnd tthathat wwereere ccharacterizedharacterized bbyy llowow llaborabor ccost,ost, yetyet sstabletable iinstitutionsnstitutions aandnd ppoliticalolitical sstructures.tructures. TThesehese factorsfactors cchangedhanged tthehe ppowerower eequilibriumquilibrium
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