05/04/2012 05:22 PM .

Millions Left Behind in Boom
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The High Cost of Germany's Economic Success

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Countries around the world envy Germany's economic success and look up to it as a role model. But a closer look reveals a much bleaker picture. Only a few are benefiting from the boom, while stagnant wages and precarious employment conditions are making it difficult for millions to make ends meet. By SPIEGEL Staff
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What a year it's been for carmaker Audi and its employees, a year marked by the biggest profits in company history, a bonus in the millions for its chairman and handsome bonuses for many employees -- though little to nothing for those at the very bottom of the pay scale.








Technically speaking, Nadja Klöden isn't even at the very bottom of the hierarchy at Audi, which is based in Ingolstadt, near Munich. She's on the sidelines, yet also in the thick of things. The 28-year-old, who studied business management, works as a project assistant in administration. But her employer is BFFT, a service provider that organizes parts distribution among the Volkwagen Group's subsidiaries, which include Audi. That's why Klöden earns €800 ($1050) less than comparable Audi employees for the same 40-hour work week. In other words, although she contributes to the success of the company, she doesn't directly benefit from it. She receives neither an Audi-level salary nor any bonus whatsoever.




Helen Kozilek is in a similar situation. The 26-year-old works full-time on the assembly line at Audi, but the carmaker doesn't pay her wages. Instead, she is paid by Tuja, a temporary-employment agency and subsidiary of the Swiss temp giant Adecco. Compared with Klöden, however, Kozilek can consider herself a higher earner. The hourly rate for temporary workers in her salary group is normally about €10. But IG Metall, Germany's leading metal workers' union, has signed a wage agreement with Adecco so that Kozilek benefits from the €16 rate negotiated by the union. Still, Kozilek doesn't receive a bonus.




Franz Wolff, on the other hand, is sitting pretty. He has been working in maintenance at Audi's car painting division in Ingolstadt for the last 32 years.
Wolff has a 35-hour work week and earns a gross salary of €3,300 a month, which is based on an industry-wide multi-employer agreement. Through an in-house wage agreement between the works council (the body that represents the interests of workers) and management, the 57-year-old trained auto mechanic also receives profit-sharing payments. This year, Audi will pay Wolff a bonus of €10,000. The average bonus at Audi is €8,251 -- a record. Audi values Wolff's contribution to its success -- and it provides him with a share of it.



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Audi CEO Rupert Stadler's salary was also probably record-breaking, climbing 73 percent last year to reach €7.6 million.




One company. Four employees. Four worlds.



Broken Promises




"Prosperity for all" was once the credo of Ludwig Erhard, the first economics minister of postwar Germany. This promise shaped the country for decades and set it apart from many other economies. But how much is this promise still worth today?




The working world is disintegrating. On the one side are managers, specialists and members of the core workforce, who benefit from the fact that well-trained workers are scarce. On the other side is the reserve pool of workers who can be used as needed and then let go -- as contract workers or through special-order contracts, part-time work or temporary jobs. Many of these people work outside the provisions of collective bargaining agreements.




Labor-market experts view this increasing flexibility as the price of success, a necessary evil that made the rise of the German economy -- from "the sick man of Europe" to the Continent's economic paragon -- possible in the first place.




In fact, the German economy is in better shape than ever. Companies are reporting record profits, the size of the working population reached a new peak in 2011 and, according to Germany's Federal Employment Agency, the ranks of the unemployed have shrunk to only 3 million. In March, the country had an unemployment rate of just 7.2 percent.




Some companies are allowing their employees to benefit from the economic upswing through profit-sharing models. One of them is Sedus Stoll, a mid-sized maker of office furniture in the southwestern German town of Dogern, which has allowed its employees to share in company profits for the last 60 years. The aim is to ensure that the 950 employees "identify with the company" and learn to think for themselves even though they are part of a larger organization, says Carl-Heinz Osten, the company's chief financial officer.





A portion is paid out directly, but most of the money goes into the company's pension plan. Herbert Ebner, the chairman of the works council, says that, "in good times," employees have even taken home the equivalent of 15 or 16 monthly salaries each year.







Still, such ideal conditions are rare. Contrary to what the headlines about record bonuses in the automotive and chemical industries would suggest, only few employees benefit from them, as only 9 percent of German companies have profit-sharing arrangements with employees.




The majority of workers feel very little of what the Economist has dubbed "Germany's economic miracle." For decades, they have had to settle for falling or stagnating real wages, and wages and salaries have been declining for many years as a share of aggregate national income. "In no other European country has social inequality grown as strongly as in Germany," says Gerhard Bosche, the specialist in industrial sociology who heads the Institute for Work, Skills and Training (IAQ) at the University of Duisburg-Essen.




Unions in a Pinch



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The ongoing collective bargaining round won't fundamentally alter any of this. Ver.di, the services sector trade union, achieved its best outcome in a long time in labor negotiations for municipal and federal public-sector workers. Nevertheless, Ver.di Chairman Frank Bsirske was unable to push through the desired "social component," a minimum monthly increase of €200 in the lower salary groups.





The powerful IG Metall is currently fighting to secure its members a 6.5 percent wage increase. In recent weeks, the third round of negotiations failed, and now warning strikes and possibly a tough labor dispute could follow.




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While skilled workers in unions can expect to see increases, the prospects are grim for those at the lower end of the pay scale. Employer representatives have made it clear that they will resist IG Metall's demand to be given more of a say in the use of contract workers and employees hired through special-order contracts.





The unions face a dilemma. They are poorly represented among the employees in precarious circumstances, who would actually need their help the most. With their higher-earning core clientele, however, they face competition from new types of niche unions, which are promising special conditions to privileged professional groups, such as train drivers or air traffic controllers. It is one of the "dark sides of the boom," says labor sociologist Bosch, that most low-wage earners are not getting "a fair share" of Germany's economic success.




A Fracturing Society




It's a paradox: At a time when the economic elites in the United States and Great Britain are turning to Germany's recipes for industrial success as role models, the social structure in Germany is increasingly moving in the direction of a three-class society. This is a fundamental shift for a social market economy whose policies have long been aimed at ensuring that the country's prosperity is fairly distributed to all echelons of society. That system now appears to be eroding fast.




These days, it is executives, with their compensation skyrocketing into the millions, who are at the top. The second tier consists of the well-trained and reasonably well-paid legions of white-collar and skilled workers in modern information and industrial societies. Bringing up the rear are professional groups that were once considered part of the core of the traditional working world: salespeople, cooks, waiters and teachers, for example, who often earn less now than they did a decade ago.




In his inaugural speech, Germany's new president, Joachim Gauck, praised his country for "bringing together social justice, participation and opportunities for advancement." But Germans, the president warned, should not accept "people having the impression that advancement is out of their reach despite their every endeavor."




But this is precisely the case now, and, as a result, the old questions of wealth distribution are being asked once again. How can we overcome the gap between rich and poor? How can all employees share in the growing prosperity? And, most of all, what roles should politicians and the parties to collective bargaining agreements play in the process?





It isn't just the long-term unemployed who feel marginalized, but increasingly people who work in industries with narrow profit margins, or in which wages are a determining factor in competition. There are also those who work in the public sector, where there are often few opportunities for career advancement.

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On the Darker Side of the Labor Divide



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A small party was held last December to celebrate Sabine Rieckermann's anniversary in her job, but it hardly reduced her frustrations. "I've been working for the city for 25 years now, and I've been stuck in the same job for the last 16 years," Rieckermann says. "For me, there are practically no opportunities for advancement. I'm not getting ahead anymore."

Rieckermann, a member of the Ver.di union, has held many jobs for the northern city-state of Hamburg over the years, in both city agencies and schools. "I've learned a lot, I've continued to develop personally and professionally, and I've gained management experience," she says. "But, at some point, you just hit the ceiling. It's pretty bitter."




She has been in the sixth compensation group of the public-sector wage agreement for the German states since 1996. But the most recent Ver.di wage agreement only applies to employees of the federal government and municipalities. As the director of a school office, she is unable to enter a higher pay group. "It makes no difference at all whether I'm doing a great job or getting poor evaluations,"
Rieckermann says. "My actual performance simply doesn't matter." She feels she has hit a dead end despite being relatively privileged, with a more or less secure job and a somewhat acceptable income. Millions of other employees would completely envy her situation.




But now there are about 1 million temporary workers in Germany, and they often do the same work as their full-time counterparts for significantly less pay. In many cases, they don't know where they'll be working in a week or whether they'll be able to keep their jobs if their employer doesn't have enough work for them.





The boom began with the statutory deregulation of temporary work in 2003. Previously, highly prohibitive legal restrictions made a mass scale temp industry next to impossible. Since then, the number of temporary workers has almost tripled, from a little over 300,000 to more than 900,000.




Earnings are low, even though there is now a minimum wage in the industry. In 2010, normal full-time employees who are required to make social insurance contributions earned an average gross monthly salary of €2,700, as compared with only about €1,400 for temporary workers.



"Temporary work is the most visible sign of the brutalization of conventions in the labor market," says Detlef Wetzel, the second chairman of union IG Metall.




But temp workers are only part of the low-wage sector. According to think tank IAQ in Duisburg, about 8 million people in Germany now work for an hourly wage of less than €9.15, while 1.4 million receive less than €5 per hour.




Working More for Less


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Since no one can live on incomes like these, many workers have to rely on public assistance to supplement their earnings. Many are also part-time employees, but some 329,000 people with full-time jobs are still unable to make ends meet. Jens Vandrei is one of them.






After almost six years of work and several promotions, he is back where he came from. "At the club," says the 43-year-old, referring to his local job center, where unemployed Germans must go to collect their benefits and also search for new work.




Vandrei was receiving welfare benefits under the Hartz IV program for the long-term unemployed when, in June 2006, he was placed at a high school in Hamburg in a so-called one-euro job, which paid him that hourly amount while allowing him to keep receiving regular welfare payments. He worked as a handyman, and he was good at it. The school kept increasing his hours until he was offered a part-time position and then a full-time one. Nevertheless, he kept receiving Hartz IV benefits.




Vandrei's is actually a success story, given that he was out of the work force for years before being placed at the school. But Vandrei and his family -- which includes his wife, their three children and her son from a previous relationship -- can't live on his gross monthly income of about €2,000.




In late February, Vandrei returned to the "club" to file an application for supplementary Hartz IV benefits. "The €217 end-of-year adjustment in the electricity bill knocked us off our feet," he says, adding that he goes to work every day a "nervous wreck" with money troubles on his mind. He and his wife wear second-hand clothing they get from relatives and acquaintances, but finding clothes for their growing children is naturally a bigger problem.



When Vandrei, a union member, switched to a full-time job two years ago, his situation didn't get any better. On the contrary, he says, "I had twice as much work but less money." Since he was working full-time, he was no longer eligible for the supplementary Hartz IV assistance through the job center, and since he was earning more money, the day care fees for his children increased. On balance, his monthly income dropped by €25. "There is something wrong with our system," Vandrei says.


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Pitting Workers against Workers



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Since the situation is so precarious in the lower wage groups, Ver.di Chairman Bsirske has been set on establishing a "social component." Berthold Huber, the chairman of IG Metall, also wants to fight for more than higher pay in the current wage dispute. In a SPIEGEL interview in early March, when the talks were just starting, he said that IG Metall "isn't just a moneymaking machine." In the past, this would have been an outrageous statement for a chairman of IG Metall given the decades his union has spent serving its core clientele.




But now the union is also addressing the needs of the less established workers and trying to help them gain a foothold. The union has already convinced more than 1,200 companies to pay temporary workers the same wage negotiated for IG Metall members. In the current collective bargaining round, it also wants employers to include members of the works council in decisions on the extent to which temp workers are used. And, lastly, the workers' organization is currently trying to convince the temporary-employment industry to require companies to pay extra wages to workers when they are used in the metal and electronics industries.



The union's aim in this is to make temporary work so unattractive to companies that they might consider employing temp workers on regular terms. It also wants to prevent any further shrinkage of the core workforce.




Niche Unions' Threats to Solidarity




But the big unions are caught in a dilemma. When making their wage demands -- and especially when signing collective bargaining agreements -- they have always had to make allowances for industries and companies that are not as profitable as others. This sort of compromise requires solidarity from all parties involved. But, these days, not all professional groups are willing to compromise. In fact, they want more, and new labor unions are stepping in to fill the vacuum.




The official establishment is terrified by people like Dirk Vogelsang. The 55-year-old lawyer in the northern city-state of Bremen is the strategic mind behind several niche trade unions, which only represent the members of specific professions within a company, such as pilots and train drivers.



The separatists have had many successes in recent years with their focus on the few, sometimes securing significant pay increases for their clientele. Members of these mini-unions seem to enjoy a constant upswing no matter how the economy is doing.




Vogelsang benefits from the weakness of the big unions and dissects their crisis with relish. He simply turns around the charge that his niche unions lack solidarity. "Most trade unions adhere to the notion, influenced by a rush to obedience, that only a fixed wage bill is negotiable in collective bargaining rounds."




"It isn't that some employees are fighting against other employees," he continues. "We're all fighting against the employers, and we want to take away as much possible from this opponent."



Still, Vogelsand won't go so far as to say it's best to pursue the principle of every professional group for itself and no one for all. Instead, he says that niche unions will remain the exception because very few employees pose as much of a potential threat as pilots and train drivers.



In other words, the powerful will prevail and receive even more compensation in good times, while the replaceable will have to settle for less even during economic booms.




"So far, niche unions have arisen mainly in places where competition is weak," says Justus Haucap, an economist at Düsseldorf's Heinrich Heine University and head of Germany's Monopolies Commission, which advises the government in Berlin on competition policy. Like Vogelsang, he sees a trend toward mini-unions representing professional groups that cannot be replaced by other employees within a company. He also believes that, when push comes to shove, the negotiating power of the few specialists is greater than that of the larger group.




But, unlike Vogelsang, Haucap is convinced that the wage pie wouldn't get any bigger if more unions fight for their share of it but, rather, that the pieces will only get smaller. "The distribution battle is no longer being fought just between capital and labor," he says, "but also among the employees themselves."


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What Politicians Have to Do



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If nothing happens, the chasm between those who can participate in the growing prosperity and those who are left out of it will only continue to grow. The reforms of recent years have clearly failed to reach one of their two goals. More temporary labor and short-term employment relationships were intended to make the labor market more flexible and thereby lead to more employment, and this has been achieved. But they were also expected to form a bridge from unemployment into well-paid staff positions, which hasn't happened.

"The hopes of non-core and temporary workers of entering the core workforce and thereby participating in prosperity have hardly been fulfilled so far," says Lutz Bellmann, a labor market specialist at the Institute for Employment Research (IAB) in Nuremberg, a division of the Federal Employment Agency. Only about 8 percent of temporary workers are permanently hired within a year by the companies they are used in, he explains, and very few successfully negotiate the transition from mini-jobs and short-term work contracts into the safe world of wage-agreement tables and bonuses. As in society at large, Bellman says, "permeability decreases as you move up."




Ulrich Walwei, the IAB's deputy director, has just examined all the available labor market data. The results are clear: As qualifications decline, the risk of unemployment multiplies. In other words, education exponentially increases job prospects. As Walwei notes, the gap "between the wages of people with good and bad qualifications has grown in recent years." Those with poorer qualifications are highly likely to end up in precarious employment situations.




In fact, this growing chasm between the top and the bottom is not only growing in Germany, but also in many countries across the world, according to organizations such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD). Experts see the growing divide as a threat to long-term economic growth. "We will only achieve this goal if prosperity is distributed more widely throughout incomes," says Peter Bofinger, a prominent economist and government adviser.


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Different Times, Different Challenges



But how can employees be given a share in the continually growing prosperity? And what role should politicians play if the parties to wage agreements are too overwhelmed to solve their problems?




Ten years ago, when Germany was stuck in a reform bottleneck and thousands of jobs were being lost to low-wage countries, there was a need for policies that promoted more jobs and economic competitiveness. But, today, the challenges are different. To narrow the gap between rich and poor, the labor market and the tax and social systems must be fundamentally altered:


  • One reason that the low-wage sector has grown so strongly in recent years is that a statutory minimum wage only exists in certain sectors. If a minimum wage of €8.50 were introduced nationwide in Germany, 25 percent of all female employees would immediately earn more money, and some 15 percent of male workers would see their pay go up.

  • The tax burden for higher earners has significantly gone down in recent years. First Helmut Kohl, the member of the center-right Christian Democratic Union who served as Germany's chancellor between 1982 and 1998, eliminated the wealth tax. And then Gerhard Schröder, the Social Democratic chancellor between 1998 and 2005, reduced the income tax. But both the IMF and the OECD say these steps went too far and recommend that the government tax the affluent more heavily again, possibly through higher levies on property or inheritances.

  • Low-wage and normal earners bear a particularly large burden in the German social security system because, for example, health insurance premiums are only paid on up to €45,900 in gross annual income. All income above this threshold is not subject to a premium payment. As a result, a senior engineer with an annual income of €150,000 is only required to pay 6.6 percent of his total income in social security contributions, whereas a laborer who makes only a tenth as much is required to pay 20.7 percent of his income. However, the claims to unemployment compensation or a pension that he acquires with these payments are often only at the level of the welfare he would be entitled to anyway. To offset this disadvantage, years ago, the German Confederation of Trade Unions (DBG) called for a system of tax exemptions that would ease the burden on lower earners.

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The Needed Agenda 2020



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Those hoping to narrow the gap between rich and poor cannot put all their trust in the power of the unions and the forces of demographic change. They also have to emphasize political reforms. More spending on education and changes to the tax and transfer systems that would benefit low earners are needed. The series of labor market and welfare reforms known collectively as Agenda 2010, which Chancellor Schröder put in motion in 2003, completely reorganized the welfare state and were necessary for making Germany's economy globally competitive again. But, to achieve more social equality, we now need an Agenda 2020.



Indeed, what's needed is nothing less than a change in the system so radical that it would make the painful Hartz reforms (named after former Volkswagen exectuve Peter Hartz, who advised the Schröder government closely on its ambitious structural reforms) seem like cosmetic surgery by comparison. Hilmar Schneider, director of labor market policy at the Bonn-based Institute for the Study of Labor (IZA) and one of Germany's best-known employment experts, agrees. He notes that there is no alternative to making the working world more flexible, adding: "The days of small changes are over."



REPORTED BY SVEN BÖLL, MARKUS DETTMER, CATALINA SCHRÖDER, JANKO TIETZ AND FLORIAN ZERFASS




Translated from the German by Christopher Sultan


Confirmed: America’s jobs crisis

Mohamed El-Erian

May 4, 2012




Friday’s US jobs data sound a warning that should be heard well beyond economists and market watchers.


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With just 115,000 new jobs in April, the US economy is not creating enough employment opportunities to make a dent in the 12.5m jobless Americans in the labour force, of which a stunning 5.1m are long-term unemployed. Moreover, the disappointing monthly number managed to fall short of analysts’ massively subdued consensus expectation of 160,000, highlighting yet again the unusual sluggishness of the labour market.



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Americans that do have jobs are experiencing no wage growth. Measures for both April hourly earnings and hours worked came in flat, confirming that purchasing power for most workers is failing to keep up with inflation. This is consistent with earlier data on the personal savings rate, which has fallen to levels that suggest a quickly eroding precautionary cash cushion for too many Americans.



.And then there is the labor participation rate which measures the number of adults in the labor force. This declined yet again and, at 63.6 per cent, is at a level last seen in 1981. In addition to highlighting the secular headwinds to income and wealth generation, this makes a mockery of the published unemployment rate of 8.1 per cent — a number that would be over 10 per cent if discouraged Americans had not dropped out of the labour force in their millions over the last few years.



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The economic implications are clear. On current trends, consumption (by far the largest component of gross domestic product) is in no position to be a sufficiently dynamic engine of growth – and this at a time of considerable headwinds emanating from a recession-hit Europe.


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Moreover, the balance of risks is tilted to the downside given a potential year-endfiscal cliff” that, absent proper political reactions, would suck out some 4 per cent of GDP in purchasing power, and do so in a disorderly fashion.





Friday’s disappointing jobs report will also worsen Washington’s highly polarised politics. Already, initial reaction from there suggest that, rather than act as a catalyst to bring the political class together to address a persistent national problem, the numbers are fueling conflicting political narratives and greater polarisation – thereby reducing further the probability of any timely convergence towards the type of common analysis and common vision that are needed.





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With virtually all government entities essentially paralysed by political gridlock, the Federal Reserve will soon confront yet another lose-lose policy dilemma. Does it renew its unconventional activism using inevitably blunt tools that involve a growing set of collateral damage and intended consequences; or does it stick to the sidelines and watch the economy weaken further in the summer?




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And then there are the social consequences. Friday’s numbers speak to the growing stress on America’s already-stretched safety nets, as well as its growing income inequality. It also points to the possibility (though, fortunately, not yet a probability) of a lost generation. With teenage joblessness stuck at 25 per cent, too many young people face the risk of going from being unemployed to becoming unemployable.



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To many, this analysis will seem overly downbeat. It is not. It is a reflection of a multi-faceted unemployment crisis that politicians, both in America and Europe, are failing to comprehend, unite around, and respond to.


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Let us hope that this latest set of data becomes a call for action. If not, I worry greatly that facts on the ground will unfortunately warrant future analyses to be even more disheartening.