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Reforms, Macroeconomic Policy and Economic Performance in Germany

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  • Carlin, Wendy
  • Soskice, David

Abstract

The conventional diagnosis of Germany’s poor economic performance focuses on supply-side weaknesses and the need for more vigorous reforms to make low-skill labour markets more flexible. We question this on both theoretical and empirical grounds. In an extended version of a New Keynesian model shifts in aggregate demand can move the economy along a range of constant-inflation medium-run unemployment equilibria. The evolution of the real exchange rate and the external balance help to identify whether aggregate supply or aggregate demand shifts have been dominant in accounting for changes in unemployment. We provide some prima facie evidence for Germany and the UK that aggregate demand factors have played an important role in sustaining growth in the UK and weakening it in Germany over the medium run. We show that Germany has a relatively strong record in implementing OECD recommended reforms but the expected employment effects in low-skill service sectors appear disappointing and poverty has increased. By contrast, it is in high productivity sectors including services that the German economy has performed well, especially in exports. Here labour markets are not flexible in the conventional sense: codetermination, vocational training, and coordinated wage bargaining are important. We pursue the implications of these claims for the design and political economy of reforms in Germany.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6415.

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Date of creation: Aug 2007
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Handle: RePEc:cpr:ceprdp:6415

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Keywords: aggregate demand; German economic performance; labour market reforms; macroeconomic policy;

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References

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  1. Christian Dustmann & Johannes Ludsteck & Uta Schönberg, 2009. "Revisiting the German Wage Structure," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(2), pages 843-881, May.
  2. Jerome Adda & Christian Dustmann & Costas Meghir & Jean-Marc Robin, 2010. "Career progression and formal versus on-the-job training," IFS Working Papers, Institute for Fiscal Studies W10/13, Institute for Fiscal Studies.
  3. Galí, Jordi & López-Salido, J David & Vallés Liberal, Javier, 2005. "Understanding the Effects of Government Spending on Consumption," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5212, C.E.P.R. Discussion Papers.
  4. Carlin Wendy & Soskice David, 2005. "The 3-Equation New Keynesian Model --- A Graphical Exposition," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 5(1), pages 1-38, December.
  5. Dean Baker & Andrew Glyn & David Howell & John Schmitt, 2002. "Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2002-17, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  6. David R. Howell & Dean Baker & Andrew Glyn & John Schmitt, 2006. "Are Protective Labor Market Institutions Really at the Root of Unemployment? A Critical Perspective on the Statistical Evidence," CEPR Reports and Issue Briefs, Center for Economic and Policy Research (CEPR) 2006-14, Center for Economic and Policy Research (CEPR).
  7. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc.
  8. David Soskice, 1994. "Reconciling Markets and Institutions: The German Apprenticeship System," NBER Chapters, in: Training and the Private Sector, pages 25-60 National Bureau of Economic Research, Inc.
  9. James J. Heckman, 2002. "Flexibility and Job Creation: Lessons for Germany," NBER Working Papers 9194, National Bureau of Economic Research, Inc.
  10. Carlin, Wendy & Soskice, David, 2005. "Macroeconomics: Imperfections, Institutions, and Policies," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198776222, October.
  11. Rowthorn, R E, 1977. "Conflict, Inflation and Money," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 1(3), pages 215-39, September.
  12. Leonor Coutinho, 2005. "Fiscal Policy in the New Open Economy Macroeconomics and Prospects for Fiscal Policy Coordination," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 789-822, December.
  13. Christopher Allsopp & David Vines, 2005. "The Macroeconomic Role of Fiscal Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 21(4), pages 485-508, Winter.
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Cited by:
  1. Till van Treeck, 2012. "Did inequality cause the U.S. financial crisis?," IMK Working Paper 91-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  2. Ronald Schettkat & Rongrong Sun, 2009. "Monetary policy and European unemployment," Oxford Review of Economic Policy, Oxford University Press, vol. 25(1), pages 94-108, Spring.
  3. Damiani, Mirella & Pompei, Fabrizio, 2009. "Labour protection and productivity in the European economies: 1995-2005," MPRA Paper 12710, University Library of Munich, Germany.
  4. Olivier Giraud & Arnaud Lechevalier, 2010. "L'éclatement de la norme d'emploi en Allemagne et en France au tournant du siècle," Post-Print halshs-00532915, HAL.

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