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Gridlock in Germany and Britain
From: London School of Economics and Political Science
| By:
Wolfgang Streeck |
EDITOR'S INTRODUCTION |
 The Third Way, a label used to refer to debates about the renewal of social democracy, is not as liberating a philosophy as it is often made out to be. Wolfgang Streeck, an adviser to the German Alliance for Jobs, claims that the social democratic governments of Britain and Germany are hamstrung. Britain is trapped in an economic structure that promotes great inequalities but low unemployment. Germany is trapped in a reverse structure, one with great equality but the exclusion of many from the labour market. How can both countries use the same philosophy to address such contradictory situations? |
 n politics, time and place matters. Especially for the renewal of social democracy in government (and I emphasise social democracy) in government. What I want to do in this article is point out a few paradoxes or dilemmas that Britain and Germany and their respective governments are facing and maybe thereby to point out some of the problems of applying a political concept or a political idea to the practical business of politics. |
Things change very fast. We learned this from Anthony Giddens in The Age of Globalisation. One year is a very long period, and indeed in politics it seems like an eternity. The Third Way was an ideal concept, I think, for a Labour Party that took office after the Thatcher party, i.e., after a new type of Conservative Party. It was able to project some sense of compassion, while at the same time explaining to the faithful in the party and among the voters why there was no way back to the time before Thatcher. |
Although that is a useful position to be in, I think that the willingness of the government to adopt this language has something to do with the problem that it needed to be different, but not to be different in such a way that would turn back the clock. |
The fairness of inequality
One example of this paradox is inequality. It seems that the British economy during the Thatcher years got itself into a corner where it became dependent on low wages and low rights of workers to reach the very high level of employment, external investment and so on that it now obviously has in comparison to continental Europe. That structural dependence was built upon neoliberal policies, which meant absence of social policy, absence of co-determination, subdued trade unions and so on. It is very difficult to get out of a corner like this once you are in it--if you do, your own economy will punish you very clearly and very early. |
Now, poverty is a reality in Britain much more than it is in Germany. But this is a country being held up to everybody else in Europe as an example. It accepted inequality in order to combat unemployment. Can equality of outcome be replaced with equal opportunity? Can such a government tell people that, while we have to have greater wage dispersion, we can improve the opportunity of everyone so that people can move upwards? How long can one credibly promise this? How long does it take for the development to have taken place for this to be possible? I have no answer to these questions. |
No doubt it would be good if we did have answers, because it could be helpful for Germany as well, but German problems have something to do with the fact that we on the one hand cannot impose the level of inequality that the British were able to impose on their economy, and that anyway we have no credible concept of how a more unequal society could entail more equality of opportunity. |
Second question in this context: If we have to have more inequality, what about the lowest wages? How low should wages be? The British Labour government has introduced a minimum wage and is adding in-work benefits to it. If it is true that the market requires a society to be competitive in the way in which Britain has become competitive, if it is true that the market requires wages that get you below the poverty level, then we have a problem. |
There is, I think, a very elementary principle, a moral principle that people can recognise and accept, which is that someone who works 40 hours a week and then goes home should bring home an income that gets him above the poverty level. Is it true that this principle can no longer be realised? It appears to be the case, because numerous work benefit programmes assume that the market does not generate a fair and acceptable income, and the state has to put something on top of it--negative income tax, whatever you want to call it. In Germany, if we wanted to move to this we would have to lower our wages at the bottom end significantly, but then we would have to recognise and accept that we would have wages that drive people below the poverty level. |
So the question would be, then, how social democratic can New Labour in government be, given the legacy of the specific path to competitiveness? And, of course, looking at Germany: How can a social democratic government use increasing inequality to fight unemployment? |
The German problem
In Germany the situation is different. In the 1980s, we were the only country where the level of inequality did not increase but declined, the only major country where the wage spread was reduced during the 1980s. We successfully defended the high-wage, high-skill, low-inequality economy that some people have written about and described as the German model. With hindsight, we can see that we did this at significant cost. |
What we basically did was accept that a growing number of people were either unable to get into employment or had to be taken out of it because they could no longer find the sort of jobs that we made obligatory for people who wanted to work. As a result, they were taken out of the labour market. We expanded tertiary education, we expanded so-called active labour-market policy, which over time became ever more disactivating. Early retirement was used on a very large scale, and so on. We now have one of the lowest activity rates in Europe, and we moved towards what has been very aptly described as "welfare without work"--with less and less work and more and more welfare of all sorts. |
In "welfare," I include the free university education that we expanded for the middle classes. We expanded the system in such a way that now German students get their first degree on average at 28. During their entire twenties they are taken out of the labour market and put into a bloated university system, where the number of students has doubled while the number of professors has remained the same. A parking lot for surplus labour. |
The Germany of the 1980s had not just one social democratic party but two social democratic parties; the SPD and the Christian Democratic Party, which very skillfully used all sorts of public institutions and public funds and social security systems to absorb the surplus in the labour market--a surplus which could not be absorbed through traditional methods of demand expansion, because these were gone. Nor could it be absorbed by disciplining union wage bargaining, because in Germany unions are strong and the independence of unions is firmly enshrined in our Constitution. There was no public pay policy; the only public pay policy was that German wages in the public sector kept increasing, so that public-sector employment kept declining. Those who were fired in the public sector basically went into early retirement. |
So two social democratic parties and 16 years of Kohl government let things slowly rot away. Gerhardt Schroder took office with the determination to do something about the employment capacity of the German economy, that is, to increase employment rather than reduce unemployment. We had been pretty good at reducing unemployment with all sorts of statistical tricks--social security, etc. There were attempts in the Kohl government in 1989 to move away from the policy of labour retirement. But after 1989 there was this mega-incident of unification expanding the entire social security system and wage bargaining system to East Germany, throwing people out of jobs by raising their wages recklessly (one must say with hindsight) to the level of equality in the name of equal pay. |
All of this had to be absorbed by putting people on social assistance, on unemployment benefit, in public training measures, active labour-market policy and so on. East Germany now is structurally dependent on this sort of policy in the same way that the British economy in large sections depends on a low-wage policy. And in the same way in which the British Labour Party has a hard time moving away from this sort of structural dependence, we now have a hard time consolidating our social security system and introducing some sort of market reason into a system that has become hijacked for the purpose of managing the fallout from a labour market that can no longer absorb people into our sort of high-wage and high-skill employment. |
As a result, we have an enormous division in society between people who enjoy equality of income and status, but that applies to a declining number of people, and the number of people that cannot get in, which is growing. We still have a Mediterranean employment rate for women, in addition to welfare without work. |
Compounding the problem
German wages are much higher than British wages, and had we been able to do something about the low-end labour market, we could have generated employment on a large scale, with wages above the poverty level. But in Germany, given the now extremely high non-wage labour cost that we impose on workers (much higher than almost anywhere else in the world), if you want to keep 1,600 marks per month in your pocket, you cost your employer 2,400 marks. That is a flat-rate tax on employment (if you like) of 33 percent. Had we done something about this, we would have been able to generate sustainable wages that would not have needed in-work benefit programmes. But the political resistance to anything that would have tampered with the existing social security regime was too strong. |
We were happy this year with a wage settlement that was a little below that of the preceding year. Still, it included a considerable element of early retirement provisions for workers in the core of industry basically continuing the approach that we learnt so well in the 1980s and the 1990s. The only thing that is left is a budget-consolidation policy that forces the social security fund to try to find some kind of consolidation formula. Even here, the Social Democratic Party in government is unable to get much done beyond symbolic measures that will last only for a few years. |
German unions are now willing to allow social security contributions to increase to the level of 24 percent within the next 10 or 15 years, where the government has pledged to keep them at 20 percent. They have to rise because of the function that the social security system is now performing in underwriting the costs of our employment system. But, of course, the higher non-wage labour costs, the lower the level of employment so that by trying to cure unemployment through early retirement, we create even more unemployment. |
Political gridlock
I want to finish by saying that political rhetoric does not really move much. Political gridlock seems to be difficult to resolve by talking. Everybody has good reasons why they want to continue their sort of system, and asking them to read about the Third Way will not change much, unfortunately. There are real problems in the application of new-left policies by social democratic parties in government. Maybe the British Labour Party will in the end be unable to be sufficiently social democratic. For the Schroder government, one can say that maybe in the end it may be too social democratic: it will be unable to take the First Way, and if it begins to take the Third Way too early, it will fail in its mission. |
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