This post is about the incredible shrinking European welfare state utopia. Please don’t take it for more than what it is—a series of random observations, not a comprehensive examination.
Many American progressives like the European welfare state. But which welfare state? Surely not the Mediterranean welfare state, which is now bankrupt. And even if the bankruptcy is partially attributable to the euro, there’s no doubt that the statist model in Greece/Italy/Spain/Portugal is flawed. So most progressives focus on Northern Europe. But not Britain, where Thatcher’s radical policy of neoliberalism opened up “savage inequalities.” No, it’s the Northern European model of Germany, France and the Nordics. Of course the Nordics have gone in for some fairly extreme forms of privatization—so much so that the conservative Heritage Institute rates Denmark as the most laissez-faire economy in the world, in the 8 out of 10 categories unrelated to size of government (taxes and spending.) Indeed Germany and the Nordics don’t even have national minimum wage laws.
Maybe that’s why Paul Krugman likes to talk about France so much. It’s got a huge government, and yet is relatively successful.
Nicolas Goetzmann recently sent me some data on Germany and France:
Germany has no minimum wage (for the moment)?
France has one, 9 euro /hour.
Germany has 5.000.000 workers below this level.
Germany has 5.5% unemployment
France has 10.5% unemployment
Same monetary policy.
Since that time we’ve had some back and forth, and Goetzmann discovered that the French minimum wage was recently raised to 9.43 euros/hour, and the following suggests that Germany now has more like 8 million workers making below that level:
The number of badly-paid Germans is rising, with around eight million (23 percent) German workers earning less than €9.15 an hour – 2.3 million more than in 1995, a new study published on Wednesday shows.
The study, which debunks the image of Germany as Europe’s last bastion of high wages, found that as many as 4.1 million Germans earned less than €7 an hour, 2.5 million less than €6. A further 1.4 million people’s hourly rate did not even clear €5 an hour.
Here’s another article:
Anja has been scrubbing floors and washing dishes for two euros an hour over the past six years. She is bewildered when she sees newspapers hailing Germany’s “job miracle.”
“My company exploited me,” says the 50-year-old, sitting in the kitchen of her small flat in the eastern German town of Stralsund. “If I could find something else, I’d be long gone.”
Stralsund is an attractive seaside town but Anja, who preferred not to use her full name for fear of being fired, cannot afford the quaint cafes.
Wage restraint and labor market reforms have pushed the jobless rate down to a 20-year low, and the German model is often cited as an example for European nations seeking to cut unemployment and become more competitive.
But critics say the reforms that helped create jobs also broadened and entrenched the low-paid and temporary work sector, boosting wage inequality.
Labor office data show the low wage sector grew three times as fast as other employment in the five years to 2010, explaining why the “job miracle” has not prompted Germans to spend much more than they have in the past.
Pay in Germany, which has no nationwide minimum wage, can go well below one euro an hour, especially in the former communist east German states.
“I’ve had some people earning as little as 55 cents per hour,” said Peter Huefken, the head of Stralsund’s job agency, the first of its kind to sue employers for paying too little. He is encouraging other agencies to follow suit.
. . .
The contrast between Germany’s record levels of employment and the dire jobs situation elsewhere in Europe is stark.
Last year, the number of people in employment in Germany rose above the 41 million mark for the first time.
. . .
In 2005, Schroeder’s last year as chancellor, he boasted at the World Economic Forum in Davos: “We have built up one of the best low wage sectors in Europe.”
In some respects it seems Germany has followed the “EITC yes, minimum wage no” mantra that American conservatives claim to support (but are often too cheap to pay for.)
One out of five jobs is a now a “mini-job,” earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.
And the following is really odd, unless you understand that conservatives don’t actually favor free markets:
Angela Merkel’s conservative government is trying to water down the effects of some labor reforms brought in by her Social Democrat (SPD) predecessor Gerhard Schroeder, a year-and-a-half before the next federal election, when she is expected to seek a third term.
. . .
Chancellor Merkel plans to introduce a minimum wage for the sectors which do not already have one and Labour Minister Ursula von der Leyen is campaigning for temp workers to get paid as much as staff.
I don’t want to make too much of all this; it’s very dangerous to compare the overall performance of countries by focusing on a single dimension. Unemployment rates change for all sorts of reasons. And minimum wage laws tend to be complex. Thus Australia has a very high minimum wage (although not nearly as high in PPP terms) but also has lots of loopholes. Germany has no official minimum wage, but lots of industry level wage minimums. So it’s not day and night.
What interested me most about the German data provided by Goetzmann is the huge number of German workers making low wages. Combine this with the fact that Germany had very high unemployment as recently as the early 2000s, and then the rate plunged as the Schroeder reforms took effect. Those stylized facts are suggestive, at a minimum.
I don’t think any of this is a definitive refutation of any single welfare state policy. But I do think this shows that it’s an open question whether even a small homogeneous European country with a high degree of civic virtue can successfully do all of the things progressives like (avoid radical privatization, have fairly high minimum wages, provide a big welfare state, strong unions, etc.) It’s even more doubtful that the full range of progressive policies would work in a huge, messy, complex society like America. I think Matt Yglesias understands this. Not sure if other progressives do.
PS. I am pretty sure that the Nordic wage policies more closely approximate a minimum wage than does Germany. Can anyone confirm?
PPS. Nicolas Goetzmann also told me that Berlin’s housing costs are barely one third the level of Paris.
PPPS. After I wrote this I noticed a good article in The Economist suggesting Hollande may do a U-turn, but not too aggressively:
THE longer François Hollande spends in office, the more it takes sharp eyesight and a clear head to follow his economic policy. Since his election last May, the Socialist president has mixed tax-and-spend measures with efforts to improve competitiveness. The rich feel squeezed; firms are annoyed by anti-business talk. Yet,with GDP shrinking in the fourth quarter of 2012 and job losses mounting, the man elected on a leftist programme is accused of a swerve to the reformist centre. What is Mr Hollande up to?
In his first few months he ticked off items on his manifesto. He lowered the pension age for certain workers. He raised a family benefit. He capped petrol prices. He vowed to stop companies closing factories. He prepared a budget for 2013 that tried to keep the budget deficit to 3% of GDP, but chiefly through tax increases: it soaked the rich with a 75% income-tax rate, and hit companies and individuals with other higher taxes. Returning from his summer break, Mr Hollande seemed like a man with the luxury of time on his side.
What followed in October was, therefore, sprung on an unsuspecting public. After a damning report on French competitiveness by Louis Gallois, a left-leaning industrialist, Mr Hollande announced €20 billion of tax breaks for companies employing low-wage labour, to compensate for high social charges. A sense of urgency and realism began to creep in. Mr Gallois talked of an “emergency situation”. For the first time, the government acknowledged labour cost as a factor behind France’s loss of competitiveness to Germany over the past ten years. Mr Hollande even started talking of cutting public spending, which accounts for over 56% of GDP. This was followed in January by an unexpected agreement with the unions to soften labour-market rules, making it easier for companies to reduce hours and wages in a downturn.
. . .
Across the country, factories have been closing. Industrial production has stalled. Entrepreneurs feel penalised. Investment plans are on hold. Anecdotes abound of rich families leaving the country. Faced with this, and with poor poll ratings, Mr Hollande has begun to recognise the limits of state power, and of a tax-and-spend policy in a country that breaks records for both. Now Jean-Marc Ayrault, his prime minister, wants “to reinvent the French model”. Pierre Moscovici, the finance minister, even claims there has been a “Copernican revolution” on the left. By conceding the need for supply-side measures to reduce labour costs, he says, the French left has made a big shift. Indeed. Some say that those around Mr Hollande in charge of economic policy, including Mr Moscovici, Michel Sapin, the labour minister, and Emmanuel Macron, the economic adviser in the Elysée, have long understood what is really needed to solve France’s competitiveness problem.
The trouble is that the rest of the Socialist Party, particularly in parliament, does not agree.
Neither does the American left.
PPPPS. 55 cents an hour?!?!? Who says labor markets can’t reach equilibrium?