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The political economy of labour markets in Germany and the United Kingdom: a primer[1]
Open Republic: July / August / September 2005

Robert Sproule, Department of Economics, Bishop’s University,
Lennoxville, Québec

	In this issue
			The political economy of labour markets in Germany and the United Kingdom: a primer Robert Sproule, Department of Economics, Bishop’s University, Lennoxville, Québec Austrian economics and business ethics Norman Barry, University of Buckingham Free to Choose Mark Wynne. Federal Reserve Bank of Dallas Flat tax: ideas and interest Anthony J. Evans Air-Safety Brussels-style: The looming regulation mess over Europe's skies Dr. Constantin Gurdgiev, Open Republic Institute, Trinity College Dublin Revolutionary Unionism John Coulter

The present paper presents an historical overview to the key factors that continue to shape the labour markets of Germany and the United Kingdom. In this overview, we discuss a chain of events that includes the rise of Thatcherism and Reaganomics, the collapse of the Soviet Union, and the changing relationship between the organised labour and the ruling party.

INTRODUCTION

In 1980, the United Kingdom had an unemployment rate of 4.9 %, a rate that was more than twice the rate for West Germany. Since then, the divided Germanys have been reunited, and in 2004, the relative levels of unemployment in the two countries have reversed. The UK has the same unemployment rate in 2004 that it had in 1980, but a unified Germany has a rate more than double the rate of West Germany in 1980.[2]

Numerous, intertwined factors have given rise to this reversal of fortunes. Prominent amongst these are rise and lasting legacy of Thatcherism and Reaganomics, the (not unrelated) collapse of the grand socialist experiment (the Soviet Union) in 1989, the ensuing reunification of the two Germanys and the associated economic dislocation. [3] The reunification of the Germanys (and its mere prospect) set in motion three other important events associated with this reversal of fortunes: (1) the Maastricht Treaty of 1991, which gave definition to the European Union (EU) [4]and the European Central Bank (ECB)[5], (2) the substitution of (West) Germany’s currency (the Deutsche Mark) for the Euro in 2002, and hence (3) (West) Germany’s loss of the Bundesbank and its direct control over its currency. This chain of events, in combination with new international standards of fiscal discipline and Germany’s notoriously inflexible labour markets, have led Germany face to face with a grim reality and with difficult choices.

The purpose of this paper is to sort through the historical record, and present an overview to the forces that continue to shape the labour markets of Germany and the UK. In doing so, we construct an argument with the following three elements.

(1) In the early years of the post-war period, both Germany and the UK (like most industrialised countries at the time) pursued counter-cyclical, Keynesian, or demand management policies. In later years, both countries abandoned this stratagem, perhaps for different reasons. In their place, both countries adopted supply-side policies. The UK has had more success than Germany in the implementation of such policies [The Economist (2004, p. 67)]. Herein lies the story, and herein lies the core of our analysis.

(2) The UK’s relative success on the supply-side stems from two key factors.

The first is UK’s adherence to an economic imperative; that international competitiveness is “the principal objective of economic policy, to which all else must be rendered accountable” [Smith and Hay (2004. pp. 7-8)]. Under the government of Tony Blair, “(S)ocial justice and competitiveness are not treated equally ... Indeed, social justice is consistently presented as contingent upon, and subordinate to competitiveness. It is competitiveness that is the more urgent priority and, serendipitously, it is seen as the means to the end of social justice ... Where issues of equity and economic efficiency are seen to clash, the overriding imperative is economic growth. Social justice is viewed as something of an indulgence: desirable, certainly, but only where the imperatives of competitiveness allow” [Smith and Hay (2004. p. 7)]. In contrast, Germany (by its adherence to tradition) has surrendered the prospect of the primacy of international competitiveness and market signals, to a competing claim, social justice [Pejovich (2001, pp. 32-34)]. So, for example, in Germany, “the objective is to allow free competition in the markets (subject to legal regulations that exclude, for example, cartelization in the markets for goods and services) but not to accept the result of the competitive market process unless it results in a ‘social balance.’ If such a balance does not result from the actions of the competitors, the government should establish it by means of redistribution of income or cartelization of the labour market” [Witt (2002, p. 367)].

The second factor is a precondition of the first. This is its adherence to a political imperative; that being the severing of the traditional post-war link between organised labour and the ruling party. In the case of the UK, this matter was addressed early in the Thatcher years, and continues to this day under Tony Blair’s New Labour Government. In the case of the Germany, the link between the unions and Gerhard Schröder’s Social Democratic Party (SDP) persists.

(3) In the ensuing comparison of the present-day public policies of Germany and the UK, the influence of Fredrich von Hayek (1899-1992), Nobel Laureate in Economics in 1974, can be felt, and echoes of his writings can be heard. For example, mention of the importance of the collapse of the Soviet Union in 1989 as a catalyst for other events was made above. In the collapse of the Soviet Union, one finds vindication of the position adopted by von Hayek in his exchange with Oskar Lange more than sixty years ago, over the relative inefficiency of a centralized economy versus a decentralised economy.[6] One can find further vindication of von Hayek’s position in a comparative analysis of the efficacy of the labour markets in modern-day Britain and Germany. Echoes of this come from many sources. One arises from the intellectual debt of: (1) the Blair Government to the Thatcher Government, and (2) Margaret Thatcher to the writings of von Hayek.[7] Another can be heard in Radnitzky’s (2002, p.32) recent critical appraisal of the EU, where he states that its member nations (which includes Germany) were free to form a “Hayekian Europe” or a “Delorsian Europe”, and they chose the latter.[8]

footnotes

[1] An initial draft of this paper was prepared for 'The Workplace of the Future: Perspectives from the EU and Canada', a colloquium which celebrated Ireland’s Presidency of the European Union, and which was convened by Bishop’s University and the National University of Ireland (Galway), in Lennoxville, Quebec, May 27-28, 2004. The author thanks the colloquium organizer, Paul Gallina, and the many participants.

[2] Source: The IMF’s website, World Outlook Economic Database, 2004.

[3] One estimate puts the cost of reunification at 1.25 trillion Euros since 1990 [The Economist (2004, p. 67)]

[4] Mertes (2002, p. 79) notes, “… the Treaty of Maastricht and its EMU project had been the result of a joint Franco-German initiative in the spring of 1990, aimed at making the imminent German reunification acceptable to Germany’s neighbors.” Dyson (2000, p. 17) states, “Kohl and Waigel were agreed that EMU did not make sense as a political and economic project unless France qualified. It was as much about strengthening the Franco-German relationship as making European unification irreversible. Hence the whole project was bound up with events and developments in France, which had domestic reverberations
in Germany.”

[5] For the history and the powers of the ECB, see BBC (2003a), Duarte (2003), and Wrase (1998).

[6] See Hayek (1945). Hayek’s core argument is this: that the non-rivalrous socialist planners, and their contrived “markets”, were doomed to fail, because they could never determine, and hence achieve, minimum-cost production [Caldwell (1997, p. 1865)].

[7] In The Downing Street Years, Margaret Thatcher (1993) writes that Adam Smith was, “the greatest exponent of free enterprise economics till Hayek and Friedman” (p. 618). Another tribute by Margaret Thatcher to the ideas of von Hayek can be heard in the PBS three-part video series, The Commanding Heights: The Battle for the World Economy. On the other hand, a record of the intellectual debt that von Hayek had to Adam Smith can be found in Hamowy (1999).

[8]Radnitzky (2002, p.32) describes the “Hayekian Europe” as having “a multiplicity of states engaging in political competition at all levels, including currency, tax and inter-jurisdictional competition. Such a regime would be characterised by openness to the world and co-operation whenever it was deemed useful. This set-up would have a high potential for evolutionary discovery, a process similar to natural selection – versus a centralised superstate under an interventionist corporatist regime, implementing a constructivist design: dirigisme, planification pure à la Française.” With this choice made, he writes: “The current shape of the EU appears largely the unintended consequence of actions by members of the classe politique acting as rational maximisers of what they regard as their personal interest – power and income”.