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Reforms, Macroeconomic Policy and Economic Performance in Germany

  • Carlin, Wendy
  • Soskice, David

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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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
Date of revision:
Handle: RePEc:cpr:ceprdp:6415
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  1. Carlin, Wendy & Soskice, David, 2004. "The 3-Equation New Keynesian Model: A Graphical Exposition," CEPR Discussion Papers 4588, C.E.P.R. Discussion Papers.
  2. Jordi Galí & J. David López-Salido & Javier Vallés, 2002. "Understanding the effects of government spending on consumption," Economics Working Papers 911, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2005.
  3. Andrew Glyn, 2003. "Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence," Economics Series Working Papers 168, University of Oxford, Department of Economics.
  4. David Soskice, 1994. "Reconciling Markets and Institutions: The German Apprenticeship System," NBER Chapters, in: Training and the Private Sector: International Comparisons, pages 25-60 National Bureau of Economic Research, Inc.
  5. 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.
  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 2006-14, Center for Economic and Policy Research (CEPR).
  7. Dustmann, Christian & Ludsteck, Johannes & Schönberg, Uta, 2007. "Revisiting the German Wage Structure," IZA Discussion Papers 2685, Institute for the Study of Labor (IZA).
  8. Adda, Jérôme & Dustmann, Christian & Meghir, Costas & Robin, Jean-Marc, 2006. "Career Progression and Formal versus On-the-Job Training," IZA Discussion Papers 2260, Institute for the Study of Labor (IZA).
  9. Carlin, Wendy & Soskice, David, 2005. "Macroeconomics: Imperfections, Institutions, and Policies," OUP Catalogue, Oxford University Press, number 9780198776222, July.
  10. James J. Heckman, 2002. "Flexibility and Job Creation: Lessons for Germany," NBER Working Papers 9194, National Bureau of Economic Research, Inc.
  11. repec:tpr:qjecon:v:124:y:2009:i:2:p:843-881 is not listed on IDEAS
  12. repec:oup:qjecon:v:124:y:2009:i:2:p:843-881 is not listed on IDEAS
  13. Rowthorn, R E, 1977. "Conflict, Inflation and Money," Cambridge Journal of Economics, Oxford University Press, vol. 1(3), pages 215-39, September.
  14. 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.
  15. 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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