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

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]

THE IMPACT OF ECONOMIC FACTORS ON TWO LABOUR MARKETS

Tony Blair’s Labour Government was first elected in 1997. The electoral success of Blair’s team came principally from its repudiation of the past, from its rejection of “Old Labour” in favour of “New Labour”, and hence from its rejection of the “First Way” (viz., capitalism) and “Second Way” (viz., market socialism) in favour of a new “Third Way”.

What is at the core of Blair’s “Third Way”? Writing in The Guardian, Elliot (2002) notes that New Labour’s “(t)hird way economics boils down to this. First, the market is a natural state of affairs, a bit like the weather. Second, it is neither possible nor desirable to control the market in any meaningful way. Governments have to learn to live with globalisation. Third, governments should strive to make their respective nations as ‘business friendly’ as possible by gearing monetary, fiscal, environmental, educational, transport and social policies to the needs of large corporations. Finally, working people must fit into the new ‘market agenda’. They must show ‘flexibility’, work harder for longer and be prepared to shoulder the burden of ‘adjustment’, whether that be migrating to where jobs are or making good the holes in their endowment policies or pensions due to the misjudgments - or malfeasance - of the financial establishment.”[9]

Another fix on Blair’s “Third Way” is offered by Dixon (2000) in Le Monde diplomatique. He writes: “Alignment of Labour’s economic policy with neoliberal ideology was concluded in 1996. Compared with the Conservative version, only the terminology and wrapping were changed. Labour market flexibility, imposed in the heyday of Thatcherism, was now taken over as an objective of the left. Provided, of course, that it was ‘reasonable’, did not just serve to increase job insecurity, and involved the workers themselves in a strong commitment to their new terms of employment. The role of the state was confined to providing a stable framework for unrestricted competition between companies. Any government intervention had to be on the supply side, such as reform of the education and training system, to meet the demands of international competitiveness ... According to Blair, ‘the growing integration of the world economy ... means that it is not possible for Britain to sustain budget deficits or tax regimes that are wildly out of line with the other industrial countries. One of the requirements of our tax structure is to attract enterprise into the UK from overseas’ .. ‘Social democratic governments cannot resort to the traditional methods of demand stimulation and state intervention because the financial markets would not allow it.’”

Dixon’s (2000) comments draw a parallel between the policies of the Blair and Thatcher governments. Dixon is not alone in doing so. The Economist, for example, observed the same in 1998, when it stated: “Having demonised … Tory governments while opposing them Labour is understandably reluctant to admit that it is following the path they marked out. So a big part of the business of the Third Way consists of making up a story about what the Tories stand for which makes their Labour replacements look clearly different”. Likewise, Clarke (1999, p. 303) observed, in his 1998 Creighton Lecture in History at the University of London, “We can surely agree that the impact of Thatcherism has survived the political demise of its eponymous exponent – sometimes in ways faithful to her intentions, but sometimes not. In short, we have entered a post-Thatcherite phase of political economy: a statement with the election of the Blair government has done nothing to weaken.”

Tony Blair has been so convinced of the merits his Thatcher-like “Third Way” policy regime that he has flogged his wares to foreign leaders. A high-water mark of such efforts is the UK-German joint-declaration entitled “Europe: The third way/die neue mitte” [Blair and Schröder (1999)]. What then are core ideas of the “Third Way” that Tony Blair would offer, impart, or export?[10] Many of these are captured in the following five observations:

(1) Writing in International Organization on the impacts of the new reality of international finance, Geoffrey Garrett (1998, p. 779) notes that, “governments can no longer maintain, let alone expand, the generous welfare state–progressive taxation mix. Mobile firms are deemed unwilling to pay the taxes to fund government programs. … (T)he future of the welfare state can only be secured by shifting the tax burden from mobile (firms and financiers) to immobile (labor) asset holders, emasculating its redistributive effects.”

(2) Writing in Inroads, Eric Shaw (1999) notes, “To succeed, New Labour has concluded, a government has no option but to ‘convince the markets that they have the policies in place for long-term stability.’” He continues, “The welfare state sought to protect people from the impact of market forces; the social-competition state aims to equip people to adapt to market forces.” And finally, he observes that, “(a) credible government is a government that pursues a policy that is ‘market friendly’; that is, a policy that is in accordance with what markets believe to be sound. The confidence of the financial markets has been secured by implementing ‘a rules based approach to macroeconomic policy, an independent central bank with an inflation target and a framework of medium term fiscal targets.’”

(3) In European Political Science, Shaw (2003) also notes, “Social democratic governments have no option but to rein-in social spending, lower direct and corporate taxation, encourage more private sector participation and give greater scope to the spur of market competition and individual incentives.” Likewise, he notes, “… for the Blair Government, the real problem is not globalisation, but its political resistance to it.”

(4) In a working paper, Coates and Hay (2000, p. 18) observe that: “Welfare is no longer an end in itself, but must be recast as a means to the economic imperative of competitiveness and rendered answerable in such terms.” They also note that the core of Labour’s competitiveness strategy “is the elimination of supply-side rigidities that impede wealth creation”, and that the core tenets of this strategy parallel the ‘trickle-down’ economics of the Thatcher and Major years. They then argue that “(t)he reality is that wealth creation is more important than wealth redistribution. It is successful and prosperous businesses which can employ more and more people and also ensure that public finances are sound, to that we have the resources to fund those essential public services like health and education”. And finally they state that, “(e)ntrepreneurs take risks in the face of uncertainty and open up new markets. Government should and must not hinder them, but work to ensure that the market functions properly and contributes to a strong, just and fair society. There can be no return to the outmoded interventionism of the old left. The corporatist state was tried and it simply did not work.”

(5) In a later paper, Hay (2004) notes that, “New Labour’s political economy has been informed consistently by the dual objectives of credibility (in financial markets) and competitiveness (in the productive economy). These, in turn, are seen as fundamental and non-negotiable economic imperatives imposed upon any government by the harsh economic realities of globalisation, and they provide the standard by which its economic policy should be judged. They are reflected directly in New Labour’s ‘open economy macroeconomics’ and its agenda of supply-side reform and human capital formation respectively” (p. 41).

One unintended casualty of New Labour’s commitment to an international competitiveness strategy may be New Labour’s willingness to offer unconditional support for the adoption of the EU’s common currency, the Euro. Central to this willingness is a favourable evaluation of the arguments for and against a single currency. These arguments are outlined by Eudey (1998). She notes that the benefits of a single currency include reduced costs of exchange, reduced exchange rate uncertainty, the prevention of competitive devaluations, and the prevention of speculative attacks. Regarding the costs of a single currency, she writes: “Probably the biggest cost is that each country cedes its right to set monetary policy to respond to domestic economic problems. In addition, exchange rates between countries can no longer adjust in response to regional problems.” In the case of the Euro, she notes that “the EMU member countries have … agreed to limit the use of fiscal policies”, which is a passing reference to a dictate of the Maastricht Treaty. [11]

The implications of Eudey’s observations for the UK are threefold: (1) A country that adopts the Euro would forfeit the option of pursuing an independent, counter-cyclical monetary policy. (2) A country that adopts the Euro would forfeit the option of pursuing an independent, aggressive, counter-cyclical fiscal policy because of provisions in the Maastricht Treaty and in the Growth and Security Pact. (3) A country, which forfeits the option of pursuing an independent counter-cyclical monetary and fiscal policy, must rely on wage adjustments and labour mobility to restore equilibrium in the face of an exogenous shock.[12] Thus, if it does adopt the Euro, (1) the UK would lose the capacity to run counter-cyclical policies, a policy option rarely exercised by the current and by recent governments in the UK, in any case, but (2) the UK would retain its flexible labour market, at least in the short term. However, in the longer-term, UK could lose even that equilibriating mechanism should the EU succeed in imposing its burdensome workplace- and tax-harmonization rules.

In view of high stakes associated with the decision to adopt the Euro, and the lack of a clear-cut argument in support of its adoption, it is not surprising that, on April 20th, 2004, Tony Blair reversed his long-held position; the decision to adopt the Euro would be put to the people in a referendum vote. A precipitating factor in Blair’s change of heart may have been the polling results taken between April 1st and April 6th, in which voter opposition to adopting the Euro reached a near-term high [Hutton (2004)].[13] Referendum or not, will the UK will adopt the Euro? The above arguments suggest that this is not likely.[14] But there is an additional important consideration: the Blair Government did assert early on in its first mandate that the proposition-to-adopt had to pass five (economic) tests,[15], [16] , and so far only one test has been met.[17]

Now to Germany. What has been the impact of the EU and the Euro on Germany? Germany is a founding member of the EU, and it adopted the Euro in 2002. As a consequence, Germany has forfeited its capacity to run a counter-cyclical domestic monetary policy to the ECB, and its capacity to run a counter-cyclical, domestic fiscal policy of any note. Because of Germany’s inflexible labour market [18], [19] German officials cannot count on wage adjustments and labour migration to dissipate quickly the adverse effects of an exogenous shock. These facts help to explain the difference in the relative performance of the two labour markets in 2004.

THE IMPACT OF POLITICAL FACTORS ON TWO LABOUR MARKETS

From 1945 to 1980 (but especially during the “stagflation” years of the 1970s), a link existed between the ruling party and the union movement in most countries of Western Europe [Paldam (1986), Paldam and Pedersen (1982), and Piazza (2001)]. Piazza (2001) argues that this link was broken around 1980, which is a point in time that corresponds roughly to the rise of Thatcherism, Reaganomics, and greater volumes of international capital flows. In this section, we shall argue: (1) that this severed link has endured throughout the Blair years, (2) that this link was re-established in 1998 in Germany with the election of the Schröder Government, and (3) by implication, the presence or absence of a link between the unions and the ruling party helps to account for the divergence in the policy imperatives, and in the unemployment rates, of the two nations. In particular, we maintain that the presence of such a link spawns demands for non-market, “social wages” in excess market wages, shrinks the demand for labour, and gives rise to (additional) unemployment. In a few words, this link generates more labour market inflexibility, and hence additional unemployment.

Given the tumultuous encounter between the Thatcher Government and the Miner’s Union, the case that all Conservative governments since the election of Margaret Thatcher in 1979 were independent of the unions is easy to make. What may be more contentious is the claim that a formal link has not been re-established during the Blair mandates. Fortunately, this case can be made persuasively. In his “The Role of the British Labour Party a Century On”, Eric Shaw (2002, p. 3) writes, “New Labour held that the close association with the unions had been a crippling electoral handicap, a major cause of its bleak electoral performance since the 1970s”. He continues, “ending the association, in the minds of voters and business, between the Labour Party and organised labour … is the defining core of the modernization project. It is seen as central to the ability to appeal to more affluent swing voters, and to win the confidence of employers and financial interests. Gaining the respect and the confidence of the business community – and therefore of the predominantly probusiness press – was a major strategic goal and one largely accomplished by 1997. This entailed pledging that the Conservative-built pattern of labour of law would, in its fundamentals, be respected, a pledge readily made. This was not simply for political reasons. New Labour was convinced that an anachronistic trade union movement, steeped in the obsolescent rhetoric of industrial conflict and reluctant to co-operate constructively with management for the good of the corporate sector had been a major obstacle to economic progress. It therefore steadfastly opposed repealing those items within the Conservative legislative package which, in its view, risked a recurrence of the industrial dogfights of the past.” Shaw (2002, p. 4) adds, “This perspective has clear repercussions for the Blair Government’s approach to labour management relations. Its programme, the Prime Minister explained, was ‘to replace the notion of conflict between employers and employees with the promotion of partnership’ (Blair’s foreword to Fairness at Work). The unitary frame of reference often uses the analogy of the professional football team, ‘for here, combined with the team structure and its associated loyalties, one finds a substantial measure of managerial prerogative at the top in the persons of the manager, trainer, and board members. Team spirit and undivided management authority coexist to the benefit of all’. As Blair told delegates to the Labour party conference prior to taking office: ‘forget the past. No more bosses versus workers. You are on the same side. The same team’.”

Contrast Blair’s vision with that associated with the German model of “managed capitalism” (MMC), and with the attendant link that binds the Schröder Government to the labour unions. The importance of this link is made clear by Dyson (2000, pp. 21-22), when he writes that the epicentres of the MMC are the SDP and Christian Democratic Union (CDU).[20]

Commenting on the present-day viability of the MMC, Streeck and Hassel (2003, pp. 120-121) observe that: “(i)n its hey-day, Modell Deutschland disciplined business and labour and forced them to work with each other, pursuing their respective interests in ways that did not interfere with the sustainability of the existing industrial order. With hindsight, it appears that this accomplishment was conditional on a range of factors, which were beyond the control of the parties involved. Foremost among these were world markets that not only put a premium on the comparative advantages of the German labour market regime, but also allowed for near-full employment in Germany at high and relatively egalitarian wages. This condition slowly began to wither away in the late 1970s and finally came to an end in the years after unification, when high unemployment combined with low labour market participation became the signature characteristic of the German economy.” However, “(t)he deadlock that began in the final years of Kohl is not likely to be overcome any time soon. Public finances are overdrawn, the European Union effectively enforces fiscal austerity and the limits of axation have long been reached, especially with respect to social security contributions … Macroeconomic reflation is out of the question in the Europe of Monetary Union. More employment requires more flexible labour markets, but flexibility endangers the security unions are committed to defending.”

It is clear that union support was a necessity for the election of the Schröder government in 1998, and its re-election in 2002. With this support came obligations, and with such obligations the aforementioned deadlock.[21] So for example, the Schröder government has a clear understanding of the need for labour market reform. In its Agenda 2010[22], the government states: “Either we modernize as a social market economy or we are being modernized by the untamed forces of the market which want to push the social aside ..” But the government realises also that it is in a double bind: it cannot undertake radical restructuring of the labour market without the support of organised labour [Streeck and Hassel[23] (2003, p. 120)], and that union support for radical reform is not likely.

SUMMARY REMARKS

This paper has sought to explain the disparity between the unemployment rates in the UK and in Germany in 2004. In our explanation, we cited the importance of the presence or absence of a link between the ruling party and organised labour. Here we maintained that no formal link exists between the unions and the government of Tony Blair, a fact that stands in stark contrast with the link between the unions and the government of Gerhard Schröder.

The aforementioned link explains the failure of present efforts to close the gap between policy objectives and actual outcomes in Germany.[24] As Righter (2003) observes, “Germany has its Agenda 2010, France its Agenda 2006, ..” She continues, “Yet the gaps between promise and performance are dispiritingly wide, with almost every reform watered down ... Their countries need a revolution on the scale of the Thatcher years, and many industrialists know it. But the truth is that their leaders, out of fear of the unions or love of the moribund ‘European social model’, will not even talk the talk.” As the The Economist (2004, p. 67) notes, “Most business people simply long for the government to get on with it, as Margaret Thatcher did in Britain in the 1980s. However, that would be very un-German. The post-war consensus model remains robust, even if the German economy no longer is.”

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”.

[9]For more detailed, academic discussions of Blair’s “Third Way,” see Arestis and Sawyer (2001), Balls (1998), Hamilton (2001), and Hay (2004).

[10] Regarding the recent efforts of the Blair Government to export its public policies, one is reminded of a parallel a generation earlier. John Redwood (the Head of Prime Minister Thatcher's Policy Unit, 1983-1985) stated in the PBS three-part video series, The Commanding Heights: The Battle for the World Economy, “A whole lot of people who were left of center thought that nationalization was Britain’s great gift to the world, and one of my phrases at the time was that having exported the disaster of nationalization to the world, Britain should offer them the antidote; it was the decent thing to do, to say we're very sorry, it didn't work.”

[11] For example, Yergin and Stanislaw (2002, p. 327) note that the Maastricht Treaty contains a series of extremely tough “benchmark criteria,” which must be met if a country is going “to climb aboard the euro wagon.” A key criterion is that its national budget deficit be less than 3 percent of its GDP. Likewise,
Mertes (2002, pp. 79-80) observes, “..the rules of budgetary discipline for EMU members prevent careless deficit spending. In Euroland countries, the ratio of the annual government deficit to GDP must not exceed 3 percent at the end of the preceding fiscal year, and the ratio of gross government debt to GDP must not exceed 60 percent.”

[12] Eudey (1998) notes, “.. when one or several countries within the currency union, but not all, face recession or an overheated economy, adjustment must occur largely through changes in wages and prices or through the movement of workers from one country to another.”

[13] About four weeks before Blair’s about face, the “Europe Yes, Euro No”, or simply the “No”, Campaign (a eurosceptic group that maintains the consequences to the UK of it adopting the Euro include slower economic growth, higher unemployment and prices, and public service cuts) put its campaign on hold [See The “No” Campaign (2004), and White (2004)]. Perhaps this decision was motivated by its anticipation of Blair’s statement, or by the no-verdict in Sweden’s referendum to adopt the Euro a half a year before [BBC (2003c)].

[14] It should be noted that these same arguments that are some of the core arguments of the “No” Campaign in the UK [BBC (2003b), Balls (2002 and 2003), and HM Treasury (2003b)].

[15] Several comments are warranted here: (1) The answer comes down to an evaluation of the costs and benefits under the options, adopt and the status quo [much like Minford (2002) has done]. (2) Those who argue for staying with Sterling include Minford (2002). (3) Those who argue for going with the Euro include Begg et al. (2003), Layard (2002), and Layard et al. (2002).

[16] In brief, the five tests are: (1) convergence with the Eurozone, (2) flexibility, (3) impact on jobs, (4) impact on financial services, and (5) impact on foreign investment [BBC (2003c)]. For more detail on the five tests, see Balls (2002 and 2003), Minford (2002), and HM Treasury (2003b).

[17] This is the “impact on financial services” test [BBC (2003c)].

[18] Several comments are warranted here: (1) For international comparisons of “labour market flexibility,” see Brodsky (1994), Sorrentino and Moy (2002), and HM Treasury (2003a). (2) A recent study reports that amongst the G7 countries, the UK had the second most flexible, and Germany had the least flexible, labour market in 2000 [Lawson and Bierhanzl (2002)]. (3) See Siebert’s (1997) and Zawadsky’s (2004) call for “labour market flexibility” in Germany.

[19] The conceptual link between an increase in labour market flexibility and the ensuing reduction in unemployment can be outlined two ways. Cox and Alm (1992) view that the labour market is turbulent, and this turbulence they term “the churn.” They argue that increase in labour market flexibility enhances labour market turbulence, which enhances job creation, which reduces unemployment. Karanassou and Snower (1998) present the “chain reaction theory” of unemployment, which posits that “high-unemployment countries require not only policies to reduce structural unemployment, but also policies that improve labour market adjustment processes.”

[20] It has been noted also that the MMC has “strong historical, cultural and institutional roots. Historically, it formed a continuity with the organized capitalism of cartels, elite networking and regulation that characterized early German industrialization. Culturally, it rested on a respect for the principle of consensus. This principle was deeply entrenched in both the political and the economic systems. Hence there was a ‘goodness of fit’ in domestic governance” [Dyson (2000, p. 21)].

[21] Mertes (2002, p. 80) notes, “Global change has also confronted German domestic politics with new challenges. Looking back to four “red-green” years since 1998, one is tempted to say that Schröder has merely intensified Kohl’s neocorporatist style of ‘round-table’ agreements between Big Business, Big Labor, and Big Government. That method no longer works. The structurally conservative network of intertwined institutions lacks the flexibility and creativity needed to give an innovative answer to globalization.”

[22] For more on Agenda 2010, see Deutsche Welle (2003b) and Schröder (2003).

[23] The Schröder government set up Hartz Commission in 2002. It was mandated to make recommendations for reforming the labor market [Deutsche Welle (2003a)]. These were supported by labor, and greeted lukewarmly by business [Fichter (2002)]. In any case, the core elements of the MMC remain untouched [Sinn (2002)].

[24] On a broader scale, witness the ambitious aspirations outlined in the EU’s Lisbon Strategy. For details on the related gap between policy objectives and actual outcomes, see Commission of European Committees (2004), and Blanke and Lopez-Carlos (2004).

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