Has Germany Been Successful Running a High-Wage Manufacturing Sector?

July 23, 2012 Print

On 13 July 2012, The Washington Post reported on a conversation that President Barack Obama had a year earlier with Ron Bloom, then his top adviser on manufacturing.  Obama asked, “Why is Germany so successful at running a high-wage manufacturing sector?”  Bloom replied that Germany’s secrets were its apprenticeship system and banks that prioritize manufacturing.  Whereas the first point has some merit, the last time the second was significant was before the disco era.  Mr. Bloom would have better served the president had he challenged the premise in Mr. Obama’s question, because Germany’s success in maintaining high-wage jobs has been greatly exaggerated.

To be sure, some of the finest manufacturing firms in the world have their headquarters in Germany.  There is also no disputing that Germany’s positive current account is principally the result of a substantial trade surplus in manufactures.  Nonetheless, over the past few decades, most trends in German manufacturing and the labor market have not been positive.

First, let us look at manufacturing as a share of employment.  It has fallen steadily over the decades in Germany, just as it has in the United States.  It is currently below 20 percent of the total labor force.  Although this percentage is higher than in the United States, the pace of decline has been comparable.  Second, let us consider wages.  The picture is by no means one of robust growth.  To the contrary, like the United States, Germany has also experienced stagnating wages for some time.  OECD data show that real net income per employee in Germany shrunk by 0.1 percent per year in the 1980s, was stagnant in the 1990s, and declined by 0.4 percent per year in the 2000s.  Third, like the United States, Germany has become a less equal society.  The Gini coefficient, which is a measure of inequality, drifted significantly upward by over four percentage points over the past decade, reaching .29 by 2010.  Labor’s share of national income has also fallen from the equivalent of 72.9 percent of gross domestic product (GDP) in 1981 to 63.6 percent in 2010.  German productivity growth has also been lackluster in recent years.  For the decade of the 2000s, real output per hour worked increased by only 1.1 percent.  In sum, manufacturing has been shrinking in Germany, just as it has in the United States, and German labor market performance in recent decades is nothing to write home about.

What, then, explains Germany’s recent sterling economic reputation?  Three things: First, Germany has managed to bring down its unemployment rate from 11.2 percent in 2005 to 5.9 percent in 2011, which was remarkable, but it did this largely by deregulating its labor market to discourage individuals from staying on unemployment insurance and expanding opportunities for part-time jobs in the service sector.  Short-time work also saved hundreds of thousands of jobs during the financial crisis.  These measures have been laudable because of the larger social objectives they accomplished—in particular, reducing unemployment—but their side effect has been to erode rather than advance high wages.  Second, even though the manufacturing share of employment has shrunk and inequality has grown in Germany, the absolute levels of both measures are still so much better than those in the United States that conditions still look considerably better in Germany when compared to the U.S.  Third, Germany has posted a current account surplus amounting to at least 4 percent of its gross domestic product every year since 2004.  A recent analysis by Germany’s central bank suggests two factors as the primary contributors to the recent surge in Germany’s current account: a shrinking population and a falloff in domestic investment.[1]  The three decades of wage restraint mentioned above also contributed to the expansion of Germany’s current account surplus.  None of these developments the U.S. would wish to emulate in order to improve its current account.

It is thus ironic that Mr. Obama was looking to Germany for answers to problems that Germany itself has so far been unable to resolve.



[1] Sabine Herrmann, “Deutsche Leistungsbilanzüberschüsse in der Kritik – weshalb?” Deutsche Bundesbank, 26 October 2011.

 

1 2 >

2 Comments

  1. avatar K Bledowski says:

    This is an accurate portrayal of Germany’s performance in manufacturing across all the metrics cited. I would round up the picture with a few additional observations.

    The relative shrinkage of manufacturing in relation to total output also extends to gross production and value added. No matter how you look, Germany saw a decline in manufacturing over the past two decades, in some instances faster than that recorded in the United States.

    On top of that, German hours worked, which were only 80% of the U.S. level in 2000, fell to 79% by 2011. Given lower overall German productivity, the trend of declining hours combined with falling population does not augur well for future competitiveness.

    Where Germany has made progress was in areas already quoted by Stephen: climbing labor force participation and sharply rising rates of take-up of women into the labor force. The latter ratios shot up impressively: the female civilian labor force as percent of population in working age rose from 63% in 2000 to 72% in 2000. And the female civilian employment rate inched up by two percentage points over the decade in Germany – higher than the one percentage point rise in the United States.

    Stephen is correct to point out the feeble German investment rate, whether in manufacturing or in services, as a worrying sign. If not spent on consumption or capital formation, Germany’s excess income must be shipped abroad if the economy consistently runs up current account surpluses.

    Germany’s manufacturing has many excellent things going for it: a long tradition of engineering, solid vocational training, and robust infrastructure. Yet its SMEs don’t aspire to grow, expand internationally or branch into networked areas, which bring synergies. As borders between base manufacturing and tech services get blurred, Germany’s static manufacturing core may yet be eclipsed by fast moving hybrid sectors of the future. The glass is certainly half full in Germany at the moment but the trends of the past decade paint a more worried future.

  2. avatar carlos says:

    GERMAN MANUFACTURIN ARTICLE by Stephen Sylvia

    Of course, German manufacturing could do better, any thing can be better. However, if we compare Germany with the US, in manufacturing and as a country in general by almost any economic and social indicator, Germany is far ahead in spite of not having any natural resources to speak of compared to the US.

    Just a few facts.

    The value of German manufactured exports is higher than the value of US manufactured exports. This in spite of the fact o having about 25% of the US population.

    Germany is ahead in many narrow highly specialized fields, like the devices that allow deep drilling and hitting the target, but also in high value mass manufacturing such as automobiles. For example, Germany manufactures each year some 5,5 million automobiles vs the US 2,7 million. This in spite of the fact that German labour costs are about double. In terms of value German auto manufacturing is of considerably higher value as Mercedes, BMW and Audi they have to themselves, along with Lexus, the World market for high end cars.

    Also worth noting German managers seem to manage better, at least in manufacturing, yet German auto executives make less money than their US counterparts.

    Germany manufactured goods exports 21% of its GDP vs 12% for the US.

    Let us not forget that Germany manages this with no MBA schools, they have only one. German business people just do not believe in the idea there is such a thing as a professional manager who, like a doctor, today can work in one hospital and tomorrow in another. They believe that before you are put in charge of a company, or even any major department of a company, you have to show your worth in a number of posting around the company. Rotating in different departments and proving your judgement over a number of years. In this way you get to know the company, the people, the technology, the culture, the market, the competition, the suppliers.

    In Germany they do not go for that hare brained idea you can attend Harvard for two years and emerge as a professional manager capable of running a cookie company today, tomorrow a computer company and next year who knows what. American MBA “trained” managers can read numbers, short term numbers mostly, so they manage short term and the results are here for all to see.

    By the way, Harvard and a few others crank out “Cadillac-like” MBAs, while the the rest make “Chevrolet” MBAs. We all now now a Cadillac was and is a souped up Chevrolet, this is why those who can buy BMW, Mercedes, Audi and Lexus.

    One after another major US corporatiosn bite the dust; GM, Kodak, the banks, etc., are just a few examples. Yes there are some exceptions like Caterpillar and Pratt and Whitney (both with heavy military markets). Even Boeing relies for much of its technology on the Japanese.

    Others like HP are reduced to designing and marketing outfits. HP relies on Canon for the heart of its printers.

    Hell! even Boeing is barely competitive with Airbus, in spite of the fact Airbus is a fairly good French company and a so-so German one.

    Keep in mind also Germany is not into some very lucrative markets like rocket angines, rockets, military aircraft, military naval vessels, etc. If it did we all know since WWII their quality will likely be superb and highly competitive.

    Even APPLE could not make the Iphone or I pad in the US. I mean, perhaps it could assemble it, like in China, but Apple or any other US company has the technology to make the screen and other key components, such technology resides in Japan, Taiwan, South Korea and soon, I fear, in China. The US as of now does not export one single Iphone or I pad, supposedly two really high tech devices.

    I also noticed most Americans managers and ordinary people, seem to consider the IPhone high tech, much higher tech than an automobile. In fact the Iphone is basically a toy, considering the number of parts that go into the lowliest car and the Iphone. Never mind the performance expected of those parts. Just an automatic transmissiojn has more partas and performs a far more sophisticated job in terms of safety and performance than the IPhone. After all Apple is some 50 000 empoyees, half of them in Applestores. Volkwagen alone employs 350 000 people in manufacturing, as retail is handled by independent dealers.

    Any car, just in electronics has more and more sophisticated than the I phone and, of course, have to meet much tougher standards of safety, as the recent Toyota recall indicate. The safety concerns around the Iphone are abour microwaves and distraction while driving bur so far, nor even US lawyers have gone after Apple for making a device that distracts people and kills them. Perhaps because the Iphone is such a cool device it block the instincts of some ambulance chaser lawyers.

    Yes, the US is full of hiper creative hiper smart people. Writers, artists, scientists, economists, Nobel Prize winner all over the place but somehow that does not seem to translate into prosperity for the middle classes, secure jobs or even sound financial insitutions. As a matter of fact, the US today reminds me of Germany in the 30s; full of hiper bright people yet the economy was going to hell in a hand basket. Let us hope the US manages to change. Unfortunately I am pessimistic because the elite that in many ways runs the US today has no clue about the running of a stable, democratic, prosperous country for any length of time and I do no see any intellectual movement able to push the current elite aside.

    By the way, one of the things the elite, mostly liberal, has achieved is to undermine US manufacturing through comedy, books, movies, etc. Basically the image that sticks today is; Industrial leaders are boring, unprincipled crooks and industrial workers are dumb. The result, US youth prefer to flip hamburguers or sell shoes to working in a car factory, even if they make half the income. The bright people go to university to study, finance, law, medicine, journalism, not engineering. Engineering is “boring”. never mind engineering is key to prosperity and health. Engineering is behind everything from health to education.

    As for the reference to the Washington Post, Obama and Mr. Bloom. the three are prettu clueless. Otherwise Obama would not have asked the question. Mr Bloom would have given a more complete answer; it is American managers, American business schools and American mainstream values today, stupid! It is not the apprenticeship system. The german apprenticeship system is good, perhaps best in World, along with the Japanese one.

    Toyota demonstrated in 1982 one of the key US problems is US management. I know it is hard to swallow when Harvard et al are in the US. The fact is Harvard does not know that nuch about running business, at least in manufacturing. Toyota took over a GM plant and with the same workers, the same union and the same technolgy in a matter of months turned it around, from worst in the US to best and comparable to Toyota plants in Japan. Yes, Toyota got rid of all GMs managers and supervisors. Unfortunately GMs “US management pride” did not allow it to want to learn from Toyota.

Leave a Comment