Labour market institutions in Germany: current status and ongoing reforms

Abstract

"Although all economists agree that a major precondition for employment creation is sustainable economic growth of at least 2% per annum, they disagree about the effects of the institutional framework on the labour market: Optimistic observers stress the high performance of external trade and the highly specialized small and medium-sized companies operating at high potential. These have a well-qualified workforce, which relies on the existence of a highly differentiated system of labour market institutions that provide a reliable basis for sustainable economic development. These analysts point to the fact that economic growth and the demand for labour is appropriately restrained by the extremely low domestic demand. Conversely, pessimistic observers blame the relatively high labour costs resulting from institutional regulation by labour and social law, collective bargaining and labour market policies as the main barrier to the creation of employment. As the German employment system can be generally characterised as highly protective and favourable to employees in respect to their labour rights, democratic participation in the economic sphere and the level of social protection, this article addresses the question of the consequences of these two diametrical strategies for the underlying principles of the German employment system. The main argument will show that intentional government reforms are a factor that only partly accounts for the ongoing basic changes. Other factors that influence the system are ongoing changes in social practices and initiatives or rulings by supra-national organisations." (author's abstract)