This chapter was prepared by John Montgomery (RES).
Frankel and Montgomery (1991) discuss some of the differences between the German and Japanese financial systems and those of the U.K. and U.S. Allen and Gale (1994) compare the welfare attributes of stylized German and U.S. financial systems.
Unless otherwise indicated, references to Bundesbank publications are to the Bundesbank Monthly Report.
Excluding assets of Luxembourg subsidiaries, which tend to be particularly close extensions of German banks’ domestic business, the proportion rose from 7 percent in 1984 to 16 percent in 1994.
Data include external transactions of eastern Germany from July 1990.
In many respects German financial markets have long been open to foreign activity. Most capital controls were removed in the 1950s, with the remaining restrictions on nonresident purchases of bonds and short-term paper eliminated in 1981 (OECD (1986)).
In addition to their participation in the DTB and other derivatives exchanges, German banks have become active participants in over-the-counter derivatives markets. At the end of 1994, German credit institutions had written a notional value outstanding of DM 2,008 billion in interest rate and currency swaps, compared with DM 922 billion two years earlier (Bundesbank (May 1995, Table IV.17)). While notional values greatly overstate the market value of these transactions, the trend over time indicates the rapid expansion of German participation in this market.
See SM/94/213, pp. 34–35.
Bundesbank, Kapitalmarktstatistik. March 1995, Table VI.1.
This issue is discussed in greater detail in Section 3.
Bundesbank (January 1993) describes this law in detail.
German banks were given a transitional period to 2002 to comply with the new rule on shareholdings. The previous rule limited “a credit institution’s investments in land, buildings, furniture and equipment, and other enterprises to the amount of the liable capital” (Bundesbank (January 1993)).
Other effects of the bank accounting changes are discussed in Bundesbank (May 1992).
A reserve requirement applies to repurchase agreements undertaken by German banks with nonbanks and with non-German banks, at the rate applicable to sight deposits (Hypo-Bank (1995)). This rate will be lowered from 5 percent to 2 percent on August 1, 1995, thus reducing the costs of undertaking such operations.
An aspect of this tradeoff is noted by Gaddum (1992), who raises the concern that minimum standards should be kept for financial institutions in order to guarantee “stability of the financial system as a whole,” while the authorities are promoting competition in the financial system.
Bundesbank (May 1995, Table IV.3).
In a related study, Borio and Fritz (1995) examine the response of short-term interest rates on bank loans to changes in monetary policy rates in twelve countries. They found that the response of interest rates in Germany after one year was smaller than all but three other countries and in recent years was smaller than all countries except France. Among the reasons they suggest for their cross-country results are differences in bank market power and differences in the response of average bank funding costs to market rates.
A law passed in 1994 will permit smaller companies to become joint-stock companies (AGs) under less stringent restrictions than faced by larger companies. These smaller companies will not be required to have worker representatives on their supervisory boards or to hold annual meetings. This action increases incentives for enterprises to issues shares.
If such efforts are undertaken, however, the contributions of the regional exchanges in bringing smaller enterprises to the stock market (Wegen (1992)) may need to be replaced by other mechanisms, such as a separate stock market for shares of smaller firms.
Recent reductions in reserve requirements have reduced the advantage of Eurodeposits in Luxembourg relative to deposits in Germany (Bundesbank (February 1994)). With the reserve ratio on sight deposits being lowered from a maximum of 12.1 percent before March 1, 1994, to 5 percent and now to 2 percent from August 1, 1995, the additional interest cost for domestic deposits over Eurodeposits at an assumed 6 percent interest rate has fallen from 0.83 percentage points to 0.32 percentage points and now to 0.12 percentage points.
Bundesbank (January 1994) describes the structure and effects of the tax in detail, and Bundesbank (October 1994) discusses the interaction of the tax with investment funds.
The restriction on repurchase agreements discussed above in section 2.c is another example of this tradeoff.
Häusler (1995) observes that differing national financial structures under EMU, including differences in reliance on short-term financing, might cause some national economies to react more quickly to changes in monetary policy.
The first DM 50,000 of long-term debt is taxed at the same rate as equity, but any long-term debt above this level is taxed at half this rate. The tax rate varies according to municipality. In 1993 the average rate was 0.742 percent.
This chapter was prepared by Paolo Mauro (EP, PDR) and Tessa van der Willigen (EU1). It is part of a cross-country study on labor market adjustment dynamics coordinated by the European I Department of the International Monetary Fund. Companion studies have been undertaken on France, Italy, Spain, and the United Kingdom.
Insufficient data preclude the inclusion of eastern Germany; but the wholesale extension of west German labor market institutions to eastern Germany means the results should also be relevant to the new Laender.
For a detailed discussion of three key features of the German labor market—the wage bargaining system, income support for the unemployed, and employment protection—see SM/94/213, Chapter V.
The Minister of Labor has the authority, under certain conditions, to extend the validity of collective agreements to employers who are not members of employers’ federations, through a “declaration of general validity.” However, these declarations involve a minority of contracts, usually relating to working conditions rather than wages.
Previously, and particularly in the metal-workers’ strike of 1984, unions had been able to conserve strike funds by striking only at selected firms and counting on other firms in the sector having to shut down for lack of supplies: employees laid off in these other firms would receive unemployment benefit.
This is not to deny the benefits of centralized bargaining, which many authors have theorized include greater overall wage restraint. See SM/94/213, Chapter V, for a detailed discussion of the advantages and disadvantages of the German system of collective bargaining.
This is true whether the labor market is broken down by region, sector, or skill level. In the last case, it is the usually egalitarian objectives of the unions that make all wages tend to move together. See SM/94/213, Chapter V, for a detailed discussion of wage differentiation in Germany.
An interesting example is provided by the 1995 wage round. The key metal-workers’ agreement was signed just prior to a sharp appreciation of the deutsche mark. Commentators generally agree that wage increases in the (export-oriented) metal-working sector would probably have been lower had the appreciation occurred before the agreement was concluded, but these wage increases nevertheless set the standard for other sectoral agreements, concluded subsequent to the appreciation.
A government proposal to limit the duration of unemployment assistance to two years was recently rejected by the Parliament.
For a detailed description of employment protection in Germany, see SM/94/213, pp. 113–114.
Of course, employment protection may also, symmetrically, delay the downward adjustment of employment in a recession. Indeed, the model investigated in sections 3 and 4 does not distinguish between the speed of adjustment to positive and negative shocks to employment demand.
See Decressin (1994) for a thorough analysis of the determinants of internal migration flows in western Germany, including a discussion of the housing market.
In all cases, there is tentative evidence that long-run relationships exist among the variables of interest. For the most part, the Dickey-Fuller and augmented Dickey-Fuller statistics are not far from rejecting the null of no cointegration at the conventional levels. In all cases, the Johansen procedure yields a strictly positive set of cointegrating vectors, which typically do not significantly differ from those of the long-run relationships estimated using both approaches adopted in this chapter.
The data are drawn from German official sources and the International Financial Statistics of the International Monetary Fund. All series refer to western Germany. All variables are in logarithms. Employment includes both dependent employment and self-employment. While formal Dickey-Fuller and augmented Dickey-Fuller unit root tests yield ambiguous results for some of the series, it seems safe to assume that all variables included in the levels regressions are integrated of order 1.
The fact that eight lags are required when quarterly data are used is consistent with the findings that two lags are needed when annual data are used, as in Karanassou and Snower (1994).
The potential role of a number of other explanatory variables—including real interest rates, competitiveness indicators (the ratio of import prices to the GDP deflator), and (changes in) the real oil price—was explored, with no significant and robust relationship being identified, so that they are not included in the preferred specification.
Little evidence was found of endogeneity bias, related to the two-way causation between (demand for) output and labor input, as two-stage least squares estimation yielded results very similar to the OLS estimates.
Because much of the impact of unemployment insurance in Germany is thought to come through the intermediary of duration of benefits, rather than their level, statutory replacement ratios were not included in the wage equation. No suitable data could be found for aggregate replacement ratios.
Over the range spanned by the tax wedge over the period 1970–94, the amount of an increase in the wedge falling on employees ranges from 40 percent to 46 percent, and the amount falling on employers from 54 percent to 60 percent. Similarly, workers are only partially compensated for an increase in the consumer price index relative to the price deflator which is relevant to employers, and an increase in the GDP deflator by more than the CPI may yield higher real take-home pay (and lower real total labor costs) as a result of the bargaining process.
However, the coefficient on g(-4) could be omitted from the ADL specification, as it is not significantly different from zero. In that case, the long-run elasticity of real wages with respect to productivity would be close to one.
While the apprenticeship system in Germany ensures that the majority of people have a qualification, the unemployment rate for the unskilled is still generally at least twice as high as for those with a qualification. In addition, the “low-skilled” should be taken to include those whose specific skills have been devalued by structural change, helping to explain the concentration of unemployment in the heavily industrial northern regions of western Germany and among older people. See SM/94/213, Chapter V.
Standard errors for this regression are corrected using the Newey-West procedure.
The measure of persistence is defined as the sum of deviations of unemployment from its baseline path in response to the temporary shock, and the measure of imperfect responsiveness as the sum of deviations of unemployment from the new long-run equilibrium resulting from the permanent shock.
Layard, Nickell, and Jackman (1991), however, also find more rigidity—in this case, real wage rigidity, interpreted as the extent to which real shocks translate into unemployment at constant inflation rates—in Germany than in France or Italy.
This chapter was prepared by Christian Thimann (EP, EU1).
The “1996 tax reform” refers to the resolution of the parliamentary mediation committee of July 31, 1995, which is expected to go forward to both houses of Parliament on August 21–22, 1995.
See BMA (1994, Chapters 19 and 20) for a comprehensive overview of the characteristics of social assistance.
Statistisches Bundesamt, Zeitreihen zur Sozialhilfe. June 1995.
Until recently, the figures for foreign recipients also included asylum applicants, who had historically been a negligible number, and who were supported out of social assistance. However, the surge in applications for asylum after 1991 led to a change in legislation in 1993, which shifted the support for asylum applicants to other funds. Since official statistics do not distinguish asylum applicants (who are not entitled to work) from other foreign recipients, a more consistent picture of developments in the numbers of recipients is provided by the figures for nationals.
In order to limit complexity of the issue, this section focuses on the group of single earners without children because they constitute by far the largest group among social assistance recipients (60 percent of recipients in 1993 compared with 15 percent who were couples with or without children, and 25 percent who were single parents).
The figures refer to 1994 and are slightly different in the other years because of nominal adjustments. The range of “tax traps” was DM 10,500–12,800 of taxable income in 1993 and DM 11,600–15,200 in 1995. In addition, the picture becomes more complicated in 1995. On the one hand, marginal tax rates in the “tax trap” region were reduced to 50 percent (see BMF, Finanzbericht 1994, p. 124). On the other hand, in this region the solidarity surcharge of up to 7.5 percent of tax liability was gradually phased in. The result was marginal tax rates between 50 and 53 percent.
As a result of the change, it is estimated that tax revenues would decline by DM 15.5 billion.
The solidarity surcharge of 7.5 percent on tax liability, effective since January 1995 for a (yet) unlimited period of time, is not relevant for the lower income ranges because incomes up to a taxable income of DM 14,150 are exempt from the surcharge, and the full surcharge begins only at DM 16,310. See Solidaritatszuschlagsgesetz. art. 3.
What is described below is based on up-to-date information provided by the Ministries of Finance and Labor in June 1995. See also Boss (1994).
The upper limit of DM 1,000 is calculated implicitly from the regulation stating that the deduction N-N’ may not exceed 50 percent of the basic allowance, B.
To simplify the analysis here we abstract from the fact that from DM 560 to DM 610 the contributions are paid by the employer. In 1994, employees’ contributions comprised 9.6 percent for pension insurance, 6.6 percent for medical insurance, and 3.3 percent for unemployment insurance. From 1995 onward 0.5 percent long-term nursing care insurance contributions also apply, but pension contributions were lowered by 0.3 percentage point, and medical insurance contributions by 0.1 percentage point. We assume a 0.2 percentage point increase in the (as yet undetermined) contribution rate for pensions in 1996. In addition, the contribution rate for nursing care insurance is likely to increase to 0.85 percent in mid-1996.
These figures refer to single earners and may be higher for couples and heads of families.
If the private provision is increased to 20 percent as currently under discussion, taxation would begin at a gross income of DM 17,750.
The values in columns 2, 3, and 6 follow directly from the schedules for social security contributions, taxes, and benefits withdrawal, respectively. Column 7 shows the implied benefit withdrawal rates as a function of gross income. The final column combines these elements into an effective marginal tax rate.
If, as assumed, the individual has to bear expenses in employment of DM 10, disposable income will actually be only DM 13.50 higher. The calculation of the marginal burden, however, abstracts from this effect to achieve consistency in comparison with regular earners who also have to bear the expenses in employment.