Wednesday, October 30, 2013

German labour market remains source of stability

Source of stability. German unemployment dropped by a non-seasonally adjusted 47,800 in October, bringing the total number of unemployed to 2.801 million, the lowest level since November 2012. In seasonally-adjusted terms, unemployment increased by 2,000, leaving the seasonally-adjusted unemployment rate unchanged at 6.9%. The Fall revival of the German labour market turned out to be slightly softer than normal. However, with these numbers, the German labour market still remains an important growth driver. Record high employment combined with yet another increase in real wages (+1% YoY since the beginning of the year) bodes well for private consumption. And, indeed, retail sales and new car registrations in the first two months of 3Q confirm continued consumption growth. Nevertheless, today’s numbers should not deviate from the fact that the German labour market has probably reached its natural level of unemployment. The de facto stagnation of both unemployment and employment rates since the beginning of the year sends a clear signal. The impact from ageing, with the baby boomer generation leaving the labour market, and immigration could become the most important drivers of unemployment rates in the coming year. Moreover, there is another element which could affect the labour market significantly: the current coalition negotiations on a minimum wage. The social-democrats have presented a nation-wide minimum wage of 8.50 per hour as a demand they will not let go. The impact of such a minimum wage on the German labour market is controversial. Opponents of minimum wages argue that they hurt jobs, supporters say that they combat exploitation and social inequality. Even historical evidence from other countries is not straight forward but provides arguments for both opponents and supporters. Economics is not an exact science. Therefore, the proof will simply be in the eating. In the short run, a minimum wage would not only increase the lowest wages but probably also wages currently (slightly) above 8.50 per hour. Households’ purchasing power could temporarily increase. To some extent, a minimum wage in Germany would mark the end of a long journey which started with the labour market reforms in the early-2000s. After the introduction of a minimum wage, it will be hard to squeeze additional positive effects out of the labour market. To continue the current job market miracle or start a new one, a minimum wage should be flanked by additional measures to create new jobs. Even children know that only redistributing the pie eventually leads to an empty plate.

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