April 17, 2006
Despite a shift toward market forces and laissez-faire , the rate of unemployment rose in Germany to 11.4 % in the latest unemployment survey. Despite a recovery in corporate investment, cutbacks in the German social welfare state and other supply side labour market clearing "reforms" incomes remain stagnant, consumption sluggish, and overall growth only 1.5 %. This is far too low a growth rate to lower unemployment. Clearly supply side and new classical macroeconomics is not working in the way the experts from this school predict. Increased productivity has come at the expense of workers incomes and therefore aggregate demand and outsourcing of labour has worsened the situation. Keynes bitte ! ought to be the German slogan of the day.
In neighbouring France where unemployment is also far too high at 9.6 %, President Chirac is foolishly planning to sign the new controversial classical macroeconomics inspired anti wage push inflation measures into law.The changes that he is proposing in the law are useful but do not go far enough in preventing the law from increasing unemployment, because of the feedback from inevitably lowered wages into aggregate demand.(Jài lìntention de ajouter cet blog en francais bientot.)
These measures are derived from the outmoded but still potent NAIRU theory which insists that unemployment is caused by inflexible labour markets and overly generous welfare state measures. The supposed solution which clearly does not work because of its neglect of aggregate demand considerations involves deregulating labour markets so that they more perfectly resemble perfectly competitive markets so beloved of neo-classical and new classical macroeconomists.
Ever since Keynesian methods of demand management were abandoned in both France and Germany and inflation and not unemployment targeted, growth has been more sluggish and unemployment much higher. The following table clearly illustrates this.
Growth of Business GDP
France Germany YEARS
5.63 3.79 1960-74
2.42 2.09 1975-84
2.34 1.54 1985-99
3.29 2.11 2000-2002
Source: OECD
Unemployment rates
France Germany Years
2.06 0.62 1960-74
6.40 3.30 1975-84
10.28 6.09 1985-99
10.49 8.10 2000-2002
9.6 11.4 current
Source:OECD
If one examines the share of wages as opposed to profits in both economies the data shows that profits as a share of the economy have been rising but conversely wages as a share falling over the past 26 years. The ``new`` labour market clearing NAIRU anti -Keynesian model argues that increasing profits and cutting wages should lead to falling unemployment. But exactly the opposite has happened. The Viennese economist Engelbert Stockhammer shows this quite convincingly in his important book, the Rise of Unemployment in Europe: A Keynesian approach.(Edward Elgar, 2004)
His data on profit shares derived from OECD statistics shows the following:
Profit share in the business sector:
France Germany
1960-74 33.29 35.11
1975-84 28.60 32.15
1985-1999 35.16 34.66
2000-2002 39.15 35.88
source: OECD Employment Outlook
Dataset (Stockhouse, p.8)
Clearly these anti-Keynesian policies don't work unless your goal is to generate a deep recession and a sluggish period of slow growth and high unemployment just to keep inflation very low. Reminds one of the reserve army of the unemployed doctrine of the nineteenth century.
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