What is behind Germany's sinking unemployment figures?

Unemployment in Germany since 1994 (% of workforce)

Source: Federal Employment Agency, Nürnberg / Destatis

This week it was reported that unemployment was at its lowest for 24 years. How come Germany is doing so well while its neighbours suffer?

The country wasn't always the shining star of Europe that it is today. In the 1990s the economy started to sag and unemployment was high especially in the states formally part of East Germany. In the 2000s, Germany turned its fortunes around and weathered a eurozone crisis and an economic recession with minimal lasting damage, quite in contrast to its neighbours. 

Counting unemployment

First of all, it's important to understand who counts as unemployed. The International Labour Organisation is often used to compare stats between countries. However, if you go by ILO's statistics, then the amount of work a person has does not count. Therefore, if an individual has one hour of work a week they can be considered 'employed'. This is clearly a terrible measure for understanding the true impact of joblessness on a country. Luckily, Germany's jobless rate can be measured by other means: those claiming unemployment benefits. 

By Germany's measure, any person who is searching for work of at least 15 hours a week and is registered with the local Job Center is considered unemployed. People who cannot work, who do not make themselves available for a job of 15 hours or more, are over 65 or who have lost contact with their local Job Center are not included in the country's definition of unemployed.

Agenda 2010

Gerhard Schröder announcing Agenda 2010. ARD / Bundestag.de

Gerhard Schröder announcing Agenda 2010. ARD / Bundestag.de

After years of persistent unemployment, reaching a peak of 11.7 percent of the workforce, what caused the dramatic drop from 2005?

That was when social democrat (centre-left) chancellor Gerhard Schröder introduced his Agenda 2010 strategy to combat joblessness by making changes in the job market.

He first took to the lectern in the Bundestag to present the plan in 2003, when 4.7 million people were out of work. Germany's GDP grew at an average of just 1.2 percent per year between 1998 and 2005 and consumer confidence was low. The country couldn't just sit back and wait for a recovery - it needed a plan. And so, Agenda 2010 was born with the twin purposes of boosting employment and economic growth. 

It was to be a rough ride. The chancellor's plan put more pressure on the unemployed to find work. 

Benefits were cut as part of the 'Hartz' welfare reforms. Specifically the amount of time you could claim ALG I (unemployment benefit at an amount tied to the worker's previous salary) was shortened from 18 to 12 months and Germany's system of employment agencies was rationalised. Some work between them was shared; the common goal to encourage people into work by any means.

If an unemployed person refused a job offer, he would face sanctions in the form of cuts to his already tiny employment benefit.  

It would be wrong to credit Schröder's plan alone for the reduction in unemployment. Low wage growth meant it became cheaper for companies to hire. Plus an exports boom meant Germany's businesses had more interest from customers and consequently needed more personnel to serve them. 

Weathering the Storm: Labour market restructing

Unemployment in Germany and Spain (% of workforce)

Source: Eurostat

Attributing the drop to Schröder's Agenda and a positive economic climate around 2005 is one thing, but how did the country weather the economic recession in 2008? There was bump in the unemployment figures but hardly the domino effect faced by less stable eurozone countries. Germany's GDP took a beating but quickly recovered. Something else must be keeping the country strong - and that something is the flexible labour market 

The country was impaired by the sudden fall of the Berlin Wall. East Germany required serious investment to get it up to standard and this weighed heavily on the economy. However, the opening up of cheap labour from the east of Europe had the effect of quieting unions. They knew cheaper labour could be brought in from the east, or work outsourced to those countries, and so they accepted wage stagnation for a time. 

Germany has a rare flexibility. Employers don't have to pay the union rate if employees agree to take less. Wage-setting in Germany is made not on an industry-wide basis but a company-wide one, allowing companies to be more flexible (its neighbours, on the other hand, generally have higher statutory wages compared with productivity). Put simply, flexible companies can take economic batterings easier than can those with wages regulated on a country or industry-wide basis.

Still, it's not necessarily a good thing. It has meant declining wages for the lowest paid. Medium and high earners in Germany have higher wages now than in 1990, low earners have less. Everyone saw their pay packet reduced after the 2008 crisis, but only the lowest-paid have not seen that recover. Germany has a big wage inequality problem and the recent reawakening of union anger over pay could be seen as a symptom of that. 

A 'Jobcenter' in Celle, Lower Saxony. Bernd Schwabe / Wikimedia

A 'Jobcenter' in Celle, Lower Saxony. Bernd Schwabe / Wikimedia

The rule often is that, when unemployment sinks, wages go up as employers strive to get new talent or keep the best workers on. It's the government's job to ensure that, with far fewer union members than before 1990, Germany puts pressure on its businesses to boost wages. 

Today

Looking back, there was nothing inevitable about the recovery. Even at the height of unemployment in its worst-affected region, former East Germany, the percentage of the workforce unemployed was not even close to that of Spain and Greece today. 

The shoots of a recovery are sprouting in Spain but 2014 saw 24.5 percent unemployment. Greece had the worst figure in the European Union at 26.5 percent.

It could be said that Gerhard Schröder's red-green coalition, plus a little luck in the economic climate, helped Germany to kick the habit of high unemployment. It was then flexibility in wage-setting that allowed German companies to get through the financial crisis.

However, low unemployment isn't everything. The current CDU/CSU-SPD government must do all it can to ensure that those who are in employment, especially those who earn the least, are paid enough for their work - something which is not the case according the recent measures. Soon it will be seen whether the recently implemented minimum wage of €1,473 per month (despite its many exceptions) has done much to change the lives of those who are employed.