Introduction, Summary, and Conclusions

Abstract

Germany’s job market is in a deep crisis.1 Economists are in general agreement that unemployment in Germany is not the result of economic cycles but is, instead, rooted in structural causes. The original German model of social market economy (Soziale Marktwirtschaft) emphasized the principle of subsidiarity and thus self-help. However, the development of unions and employer associations, and the resulting actions of political parties interested in the patronage of such entities, have changed the original German model into one of an all-embracing welfare state that guarantees individuals their acquired standard of living. This evolution is partly due to Germany’s history of being a protected industrial society where labor agreements could be negotiated between employers and employees that promised noncompetitive wages regardless of the employees’ productivity, a situation particularly true for unskilled and semi-skilled employees. Employers profited from conflict-free relations with their employees and thus from relatively few strike days. Individuals who remained unemployed due to non-market-clearing wages and excessive individual reservation wages did not suffer much, if at all, due to the elaborate welfare state that guaranteed them a high standard of living. In fact, there was very little incentive to seek full- or even part-time employment.