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Prepared by Albert Jaeger.
The term “institution” denotes here the “rules of the game” (formal and informal) in a society. A more detailed definition is provided in footnote 9.
As sources on Germany’s postwar developments this chapter draws inter alia on Giersch, Paqué, and Schmieding (1992), Deutsche Bundesbank (1999), and the consecutive annual reports (starting in 1964/65) of the German Council of Economic Experts.
As discussed further in paragraphs 15 and 16, there are important exceptions to these “rules of the game” related primarily to small-time jobs (“DM 630 jobs”) and some social insurance benefits that are not tied to previous contributions.
Two exceptional historical events, German unification and the run-up to Stage 3 of EMU, have also contributed to the procyclicality of fiscal policy during this period.
For example, the proposal by Prime Minister Blair and Chancellor Schröder (1999, p. 6) (at http://www.labour.org.uk/views/index.htm) called for “…a re-evaluation of old ideas and the development of new concepts” as “…national economies and global economic relationships have undergone profound change.”
There was an even more exceptional growth episode in 1948-50 following the currency reform of June 1948; real GDP growth during this episode averaged more than 15 percent per annum.
The skill-specific unemployment data are taken from Reinberg and Rauch (1998). A crosscountry comparison of available skill-specific unemployment data in Manacorda and Petrongolo (1999) suggests that unemployment rates of the unskilled in industrial countries are generally above those of the skilled (with Italy being a notable exception in Manacorda’s and Petrongolo’s data set). Moreover, the relative trends in aggregate and unskilled unemployment rates since the 1970s differ significantly across countries, with Germany experiencing one of the most marked relative increases in unskilled unemployment.
The term “institution” is used here in the sense of North (1990): institutions are defined as the formal and informal constraints or “rules of the game” in a society; institutions may change, usually gradually, in response to fundamental changes in relative prices (brought about inter alia by changes in the relative scarcity of factors of production, in the cost of information, or in technology) or changes in society’s preferences.
The cumulative wage drift during the period 1981-98 in industry (western Germany) amounted to 3 percent.
For additional and more detailed evidence on relative wage developments, see Chapter III.
For example, in 1949 the metal industry tariff agreements stipulated 48 hours work per week, 12-18 week days of vacation (depending on seniority), and no supplementary wage payments. By 1999, weekly work hours had been reduced to 35 hours, days of vacation had increased to 30 work days (independent of seniority), and a wage supplement (vacation bonus) amounting to 75-105 percent of monthly pay (depending on seniority) had been introduced.
This framework is developed in Nickell and Bell (1995). Chapter IV uses a formal version of this model to study tax-transfer solutions to the low-skilled labor problem.
This effect was reinforced by underestimation of the rapid growth of small-time jobs (DM 630 jobs) in the official employment statistics.
The highsider-lowsider perspective contrasts with the traditional insider-outsider view of the German labor market. The basic insider-outsider view assumes that the average wage is set to achieve the highest wage increase consistent with continued employment of insiders, ignoring the employment interests of the outsiders. The highsider-lowsider perspective suggests that across-the-board wage increases are benchmarked on the productivity performance of the highsiders, ignoring the (possibly) lagging productivity performance of the lowsiders.
For example, for persons aged 15-24, unemployment rates in Germany and France in 1997 amounted to 10 percent and 28.1 percent, respectively. The average rate for OECD Europe in 1997 was 19.0 percent.
This paragraph draws on Chapter IE, IMF Staff Country Report No. 97/101 for Germany.
The Federal government’s Annual Report 1999, signed by the previous Minister of Finance Lafontaine, argued forcefully that lack of coordination between wage, monetary, and fiscal policies was a key element in explaining Germany’s labor market malaise. The report, however, stopped short of broaching the need for institutional reforms in the labor market.
This discussion draws on Chapter I of the IMF Staff Country Report No. 98/111 for Germany.
German unification and the runup to Stage 3 of EMU, both exceptional historical events, also contributed to observed procycltcality of fiscal policy during this period.
For more details, see the IMF Staff Country Report No. 99/88 for Denmark.