Wolfgang Clement at IZA Tower Talk

Logo

Pre-Election Hot Topics in German Economic and Labor Market Policy
Wolfgang Clement
With the federal elections only a few weeks away, IZA Director Klaus F. Zimmermann debated current labor market issues at the 27th IZA Tower Talk with Wolfgang Clement, former Federal Minister of Economy and Labor, on September 2, 2013. They agreed that Germany needs to use the present favorable economic climate to promote new reform efforts rather than rolling back past reforms. “As far as the demographic transition, educational policy, green energy, and European integration is concerned, Germany is ill-prepared and often inconsistent,” warned Clement. Despite sizable economic growth and low unemployment, Germany cannot maintain its competitive edge in the absence of further reforms. As an example, Clement referred to the “central planning disaster” with respect to Germany’s nuclear energy phase-out and argued that the resulting higher electricity prices may lead firms to shift their production abroad. In the same context, Zimmermann characterized the green energy transition as a “kamikaze operation,” which cannot be successfully accomplished single-handedly on a national level but needs to be coordinated on the European level.

Zimmermann also critically assessed Germany’s efforts at promoting European integration. While conceding that cross-border labor mobility is a substantial accomplishment of the European Union, he criticized that it is not promoted sufficiently to counter economic inequalities within the EU effectively. “The dream of a European labor market is far from reality,” Zimmermann claimed. Moreover, he pointed out that the skilled labor shortages arising from demographic change will make political action more urgent than ever. In order to cope with the current European financial crisis, Clement proposed an ambitious infrastructure program, financed by private investors instead of public funds. The costs of otherwise impending tax hikes would exceed the return on investment expected by the investors, he added.
According to both Clement and Zimmermann, the substantial decline in the working-age population is the key challenge of the near future. This is particularly relevant for Germany, considering its extremely low birth rate and strong demand for skilled workers. Clement urged broad reforms to encourage early childhood education, to promote equal opportunities in education, and to facilitate the transition from school to vocational training or employment. Moreover, he advocated the abolition of the statutory retirement age so that older workers may, on a voluntary basis, keep bringing their experience to bear in the labor market. Zimmermann presented several IZA proposals that suggested the abolition of joint income taxation for married couples and the introduction of a voucher system to stimulate competition among high-quality child care providers. Clement agreed with Zimmermann that free universal full-day childcare should take precedence over free university education.

Both discussants also agreed on the need to reform the political decision-making process. Instead of the often paralyzing rivalries between the federal states in Germany and their disputes about matters of competence, there should be an effective, competitive federalism with a drastically reduced number of federal states and administrative bodies. The government would also be able to better concentrate on strategic decisions if it delegated some of its responsibilities. For instance, as Zimmermann suggested, labor market policy issues could be mainly handled by the Federal Employment Agency.

When evaluating the altogether remarkable success of the “Agenda 2010” reforms that quickly transformed Germany from the “sick man of Europe” into “Europe's growth engine,” it should not be overlooked that the urgency of the problem at the time was overwhelming and thus made the implementation of reforms politically viable. Today’s challenge, Clement and Zimmermann concluded, is not to become complacent and rely on state regulation, but to act with foresight in order to prevent such pressure from building up again.