The OECD’s latest Economic Survey of Germany recommends that innovation, education and more competition in the domestic market would help Germany emerge from the economic crisis with a stronger and more balanced economy. Labour market policy should pave the way for necessary structural changes while fiscal policy needs a specific exit strategy with focus on consolidating public finances over the coming years.
Despite a historic slump in economic activity and turmoil in its financial sector, the German labour market remains in relatively good shape. Unlike many other OECD countries, Germany has not had to cope with major imbalances in household or corporate balance sheets, nor with real estate bubbles. However, Germany has suffered as top exporter from the breakdown in international trade during the crisis.
The report sets out a detailed list of measures that could help Germany achieve more innovation and growth. They include better market access among liberal professions, easing red tape when creating and winding up businesses and better access to venture capital. The government should introduce tax incentives to encourage companies to invest in innovation, complementing existing R&D grant schemes. Innovation will be a driver for growth and job creation, but it needs to be supported by the necessary structural change. This includes measures to increase the flexibility of the labour market.
Employment protection should be adapted to make the laying off of regular job holders more predictable for employers without reducing the overall level of protection. However, a further liberalization of fixed term employment could convey the development of a dual labour market and should be reconsidered.
Reforms are also needed in education. While many OECD countries are now providing tertiary education for more than 40 percent of school leavers, tertiary attainment in German is stagnating at just above 20 percent. Despite its strong dual system of vocational training,
Germany will need to increase tertiary education. Graduates tend to earn more and, as they grow older, have a lower risk of unemployment. The vocational education system should also put stronger emphasis on teaching a broader range of skills in order to prepare young people for a rapidly changing work environment.
Flexible working time arrangements and more generous rules for existing short-time work schemes helped to shield the labour market from the worst of the economic downturn. While these arrangements helped companies keep their core staff during the crisis, if prolonged too far, they run the risk of preventing much needed structural changes. The report argues that Germany should phase out the additional benefits for the short-term work schemes and give companies more incentives to use the schemes only for jobs which they are able to sustain after the crisis.