IZA Tower Talk - Report

Norbert Walter at IZA Tower Talk: Incentives for a Higher Labor Force Participation Rate [Complete speech in German] [Norbert Walter's homepage]
On June 23, 2004, IZA organized the fifth event in its regular Tower Talk series, which takes place at the corporate headquarters of Deutsche Post World Net. Guest speaker was Prof. Norbert Walter, Chief Economist of Deutsche Bank and a frequent commentator on economic questions in Germany. With a poignant plea for Germany’s willingness to embark on reforms, he explained to more than 250 invited guests the radical measures and attitude changes he deems necessary for a successful reconstruction of Germany’s economy and social security system.	Walter
To overcome the growing shortage of young workers, it would be worthwhile to promote a higher birthrate. However, the demographic effect of such a policy would only start to show in about 20 years. Immigration could also alleviate but not solve the problem. According to Walter, we must therefore "pull out all stops" to increase the labor force participation rate in Germany. He argued in favor of raising the retirement age and extending weekly working hours. At the same time, we should better integrate women in the labor market and improve the service sector in general. Those who fail to realize these necessities "are making a big mistake". The labor market needs younger, more innovative workers. According to Walter, this requires an extensive modernization of the entire educational sector, including earlier school enrollment, more teaching of foreign languages, admission tests for secondary schools and universities, earlier graduation from the school system, and a tuition-based incentive structure for university education. A higher participation rate can also be achieved through the abolition of the minimum wage and further reforms of the tax and transfer system. In this context, Walter argued for a strictly performance-based remuneration scheme to replace the principle of seniority that Germany still adheres to. In the ensuing discussion with Hilmar Schneider, IZA Director of Labor Policy, Norbert Walter pointed out that the window of opportunity for change will close in five to ten years. This is why the elites should set a good example. They should exert a positive influence on policymakers and, in contrast to many business leaders, base their ideas and actions on long-term considerations. Walter did not deny that this process is uncomfortable and difficult to get across to the people: "When communication is poor, nobody will listen."