German unemployment increased by a non-seasonally adjusted 331,300 in January. In seasonally-adjusted terms, however, unemployment dropped to the lowest level since reunification, bringing the unemployment rate to 7.4%, from 7.5% in December.
Today’s numbers confirm the strength of the German labour market. Looking ahead, the good-news-show will continue. Recruitment plans are still improving and recently reached another record high. Moreover, the official index of vacancies increased again in January and is approaching its peak of the last business cycle. Strongest demand for labour is coming from temporary employment but also from the service sector, construction and manufacturing. With strong economic fundamentals and the first impact from the demographic change, the unemployment rate could drop below 7% already in the course of this year.
The only stain of the German labour market performance is the strong increase of the low-wage-sector. Total employment excluding the low-wage sector is currently still lower than in early 2003. Moreover, almost 50% of the newly created jobs since mid-2009 are low-wage jobs. In the short run, any employment growth should have a positive impact on private consumption. However, in the medium run, more is needed to substantially boost private consumption. Economic growth will not do the job alone.
Even if ECB policymakers will not like it: a substantial broadening of the German recovery will probably only emerge if and when the often accursed second-round effects of higher wages eventually materialise.
