Labour markets, human capital and inequality

Economic Survey of Germany 2010: Structural reforms to lift potential growth in a globalised world

 

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The following OECD assessment and recommendations summarise chapter 5 of the Economic Survey of Germany published on 26 March 2010.

 

Contents

Export led growth alone is not enough to achieve satisfactory economic performance…

The export focus of the German economy has increased substantially over the past years, testifying to the dynamic nature of the export sector. The importance of exports for economic growth is reflected in an above average share of manufacturing sectors in total value added, whereas several service sectors are somewhat underrepresented relative to other G7 economies. While a rapid expansion of global demand contributed to the pre crisis surge in exports, German companies were also able to gain market share from their foreign competitors. These market share gains owed largely to improvements in the price competitiveness of German products associated with extensive offshoring and domestic wage moderation.
In late 2008, the collapse in world trade put an abrupt end to the export boom, fuelling concerns among some commentators about an over reliance on the German export led growth pattern. However, the real policy challenge lies elsewhere. Specifically, the challenge is to consolidate and broaden the past success of the export sector to the whole economy by implementing long needed structural reforms. To achieve this goal, the policy framework needs to become more conducive to competition, innovation and structural change.

 

Determinants of capital and non capital goods exports

Source: OECD estimates.

 

…which requires more liberal product market regulation, …

Even though anti competitive product market regulation (PMR) has been considerably reduced in recent years, Germany remains more heavily regulated than many other OECD countries. In the latest edition of the OECD’s economy wide PMR indicator, it ranks 16th out of 28 countries. The government should continue to ease product market regulation as an overly strict regulatory framework may hamper structural change and competition. Furthermore, for countries at the technology frontier, lacking competition can hamper innovation. Possible actions include the simplification of the license and permit system and a further refinement of insolvency legislation in order to encourage a wider use of the possibility for restructuring and to facilitate the closure of those companies that cannot be rescued.


In addition, further effort should be devoted to easing regulation in professional services sectors. As these services are used as intermediate inputs by enterprises, a lack of competition in liberal professions not only hampers the expansion of these professions themselves but also imposes costs on other sectors of the economy. Options to ease conduct regulation include further reducing remaining restrictions on the cooperation between professions, while maintaining high quality standards, further liberalizing prices as well as reassessing the need for remaining restrictions on advertising. The conditions of entry should be simplified by rethinking compulsory chamber membership, while maintaining necessary standards for professional qualification. The number of activities over which certain professions have exclusive rights should be further reduced and the requirements for full chamber membership should be lowered further.

 

Regulation in professional services
0-6 from least to most restrictive

Source: OECD (2009), International Product Market Regulation Database, www.oecd.org/eco/pmr.

 

…more innovation …

Investment in R&D is a crucial factor for firms to stay competitive, especially in knowledge intensive industries. While overall R&D expenditure (as a share of GDP) is higher than in most other OECD economies, it is skewed towards medium high technology manufacturing sectors. High technology sectors and in particular services sectors receive only a below average share of the total funds spent on R&D activities. In country rankings of innovation performance, Germany generally performs pretty well on the output side, but is just about or even below average on the input side, for example regarding the availability of finance and government support for innovation. This bears the risk that the currently strong performance in outputs will be undermined over time by weak inputs, endangering the country’s competitive advantages in the long run.


To address these concerns, the government should strengthen the venture capital market which currently only provides a negligible share of overall financing, but is particularly well suited to supporting the creation of innovative and entrepreneurial firms. In particular, it should ensure that existing institutions on the domestic capital market provide venture capitalists with sufficient exit possibilities. In addition, it should modify the Act on the Modernisation of Framework Conditions for Venture Capital and Equity Investments (MoRaKG) to comply with EU regulation and to reduce the restrictiveness of some of the provisions in the Act. Regarding direct public R&D support, the government should consider introducing tax incentives to complement grants, though duplication of public subsidisation should be excluded. Empirical studies indicate that tax incentives are more effective in stimulating private R&D and have the advantage that winning projects are picked by the market rather than the government, thus avoiding distortions in the allocation of resources between different fields of research. When considering tax incentives, attention has to be given to the issue of policy design in order to minimize the deadweight loss.

 

…better education outcomes…

In an increasingly knowledge driven global economy, human capital development is a major driver of a country’s trend productivity, not least through its impact on innovation. Globalisation and technological progress increase the relative demand for high skilled labour as well as the need for a more flexible workforce that is able to retrain easily in response to changing economic conditions. Recent major reforms notwithstanding, more needs to be done to further prepare the German education system to deal with these challenges. Although there were no indications of broad based shortages of skilled labour ahead of the economic crisis, a lack of highly qualified personnel seems to have been a constraint in at least some sectors. These problems are likely to reappear once the current crisis dissipates and will aggravate further in the coming years on account of ongoing technological change and population ageing. To address these challenges, further reforms are necessary in three areas.


As recommended in the previous Survey, tertiary graduation rates should be lifted. While the government has made considerable progress in facilitating access to tertiary education (for example, for craftsmen), more needs to be done to raise its attractiveness through improvements in the institutional set up, for example by further raising the accountability and autonomy of tertiary education institutions.
The system immanent reform of the vocational education system should continue, especially by adaption of vocational training programs to changing labour market needs. Continuing education offers of general skills   in addition to vocational training   must be provided according to need.


The support of participation of adults in lifelong learning activities, like the recently started voucher schemes on the federal and Länder level, should be continued after careful evaluation in order to minimise deadweight losses. In this context quickly proceeding with the planned incorporation of non formal and informal activities in the Qualifications Framework for Lifelong Learning could be helpful.

 

Employment by age group and highest education attainment in Germany
% of population, 2007

 

Note: Codes refer to the ISCED97 classification of educational programmes.
Source: OECD, Education Directorate.

 

…and high skill oriented migration

Education reform alone will not be sufficient to address the issue of skilled labour shortages as changes in this area usually need considerable time to feed through into a better educated workforce. In this context, the existing complex immigration rules make it difficult for firms to fill their vacancies for skilled workers. While Germany is an important source of high skilled migrants to other countries it does not attract a sufficiently high number of high skilled foreigners. With the launch of the new Immigration Act in 2005, migration policy was fundamentally changed. While the Act by and large kept the ban on the recruitment of unskilled and semi skilled workers, a number of special entry pathways were created for high skilled workers. However, overall, the newly created immigration paths have rarely been used. The government should therefore make the current framework more attractive and should also consider engaging more actively in recruitment policy. In addition, the government should enhance possibilities for the immigration of high skilled workers, for example by introducing a points system. Finally, based on existing guidelines and forthcoming legislation the government should introduce a fast and transparent system of recognizing foreign qualifications. This would also benefit those high-skilled workers of the large foreign community in Germany who to date cannot mobilize their skills in the labour market according to their capabilities.

 

Educational attainment of immigrants

 

Note: In panel B, ratio of a country's share of the OECD's pool of tertiary educated migrants to its share of the OECD's population. Total population as of 2007 and foreign tertiary educated population as of 2000.
Source: OECD (2008), A Profile of Immigrant Populations in the 21st century, OECD, Paris, Chart 4.4; OECD (2009), The future of international migration to OECD countries, OECD, Paris, Table 2.12.

 

How to obtain this publication

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

Eine Druckversion des Policy Brief in deutsch (pdf Format) kann ebenfalls heruntergeladen werden. Es enthält die Gesamtbeurteilung und die Empfehlungen, aber nicht alle oben gezeigten Grafiken.

 

The complete edition of the Economic Survey of Germany is available from:

 

Additional information

For further information please contact the Germany Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Felix Hüfner and Isabell Koske under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.

 

 

 

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