The German Wages Problem -- A World Problem

Policy Paper
June 14, 2013

Germany and Europe at large have suffered from chronically high unemployment for all or most of the time since the 1980s. The conventional wisdom of American economists and media commentators alike offers a clear-cut diagnosis of this long-standing malaise. Often repeated and never questioned, the verdict is that European labor markets are too rigid, the old continent’s welfare systems overly generous, and wages too high. In short, European labor is simply too expensive, and employees are pricing themselves out of work as a result. Of course this conventional wisdom accords well with mainstream (neoclassical) economics more generally. On this view, if there is unemployment, wages must be too high almost by definition. By accepting lower wages, unemployed workers can always get themselves a job. Should institutions or social policies prevent this, structural rigidities are to blame, and structural reforms of labor markets and social policies are offering the straightforward route to salvation. If only the market mechanism were allowed to operate freely, and workers left free to choose, the labor market would always clear at the equilibrium wage and anyone willing to work at that wage find work without any problem at all.

Standard wisdom is quickly applied to the ongoing crisis in Europe, which is concentrated in Euroland, the subsection of the European Union that has adopted the euro as its common currency. Euroland member countries in acute crisis are bluntly described as uncompetitive, a deficiency gallantly associated with fiscal profligacy as the elixir that for long helped to cover up the underlying ailment of excessive labor costs (or, if a little more circumspection is harnessed, with private debt excesses that somehow achieved the same). For a mainstream economist it is utterly counterintuitive, if not perfectly inconceivable, that wages could ever be too low. But that is precisely the German wages problem in Europe today. The German wages problem is at the very heart of the ongoing Euroland crisis – a crisis with potentially devastating global repercussions. Therefore, the German wages problem is indeed a world problem.

Click here to read the full paper, "The German Wages Problem -- A World Problem" by Jörg Bibow.