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Germany

Remarks at Annual Meeting of the Leadership of the Social Democratic Party of Germany (SPD)

 

Remarks by Angel Gurría

Secretary-General, OECD

Berlin, Germany

Sunday, 17 January 2016

 

 

Dear Vice Chancellor, lieber Sigmar Gabriel, Ministers, dear Prime Ministers, Ladies and Gentlemen,

 

Let me start by thanking you for inviting me to this retreat. We in the OECD share a conviction with many of you:

 

Policies to foster innovation, raise productivity in an inclusive way and reduce inequality at the same time are critical for the future well-being and the future of our societies.”

 

This is not a given; it needs policy planning, policy action and the leadership to undertake reforms even if they take time to bear the fruits.

 

 

Productivity growth and inequality are closely related

 

At the watershed to “Industry 4.0”, differences in productivity account for most of the differences in material well-being over time and across nations. In recent years, many OECD countries have seen productivity growth weaken. This is also true for Germany. For example, in German manufacturing, value added per hour worked, at constant prices, rose by almost 40% between 1998 and 2006, but only by about 5% between 2006 and 2014.

 

At the same time, many OECD countries have seen inequality rise for several decades now. The average income of the richest 10% of the population is now almost ten times that of the poorest 10% across the OECD, up from seven times 25 years ago. OECD work has shown that rising income inequality reduces economic growth as people from lower-income families are less likely to use their opportunities, participate in civil society and upgrade their skills. The increase in inequality observed between 1985 and 2005 in 19 OECD countries knocked 4.7 percentage points off cumulative growth between 1990 and 2010.

 

In Germany, income inequality also increased in the early 2000s, but has stabilised since 2007. While income inequality is low, wealth inequality is higher than in most other countries. Low-educated people own 60% less than those with post-secondary education, while people with a university degree or equivalent own 120% more. Among the 17 countries for which data exist, this is the widest gap after the United States.

 

With the minimum wage you made an important additional step to address one of the major inequalities, which we welcomed in our last Economic Survey. And as the Chairman of the Board of the Robert Bosch AG, Franz Fehrenbach is with us, I cannot resist quoting again the famous German Entrepreneur Robert Bosch who said “I do not pay good wages because I have a lot of money, I have a lot of money because I pay good wages.”

 

Robert Bosch was also a pioneer in the theory that higher wages need to go hand in hand with productivity and innovation. The digital economy provides enormous opportunities to boost productivity. The challenge is to grasp these opportunities and not to leave anybody behind. Many people are worried that technical progress is contributing to decreased employment, wage stagnation and growing inequality. But while there is certainly a transition cost, in the longer term it can support higher wages, better quality jobs and more inclusive societies – provided the right policies are put in place.

 

Let me now discuss what this means for policy making in Germany, focusing on three key areas – industry, work and family policy.

 

 

Industry 4.0

 

In knowledge-intensive economies, the ability to reallocate resources towards innovative firms and sectors becomes increasingly important for productivity growth. This calls for prudent policy design that protects workers but avoids protecting established firm and sectors in the long run.

 

Knowledge-intensive services are a key driver for competitiveness, including in those manufacturing sectors in which Germany has provided the world with innovative quality products for decades, if not for centuries. Manufacturing sectors rely increasingly on knowledge-intensive service inputs, notably professional services and network services like telecommunications and rail transport. For example in machine tools manufacturing – one of the areas of excellence of Bosch AG – service sector inputs are worth as much as a third of value added.

 

To keep its competitive edge, Germany should therefore make regulation more competition friendly in these service sectors. To foster entrepreneurship, Germany should strengthen its venture capital market and ensure that business taxation doesn’t discourage people from starting a business. Moreover, lowering social security contributions, notably for low-income workers with full-time earnings, should be a priority, given that their labour tax wedge is still high in international comparison.

 

More steps also need to be taken to strengthen public investment, especially in economically weak municipalities, where growing social spending obligations are likely to crowd out growth enhancing public services. In addition, high-speed broadband rollout is very weak in Germany, depressing private investment in ICT. Ensuring access to all in an inclusive way is critical for all modern policies!

 

 

Work 4.0

 

Policy makers need to address the roots of inequalities in income and wealth and restore social mobility. Skills are a key factor in this equation. In addition, strong worker skills boost business investment, especially investment in ICT, and are therefore crucial for Germany’s transformation to a more knowledge-based economy.

 

What people need to know and do is changing rapidly because of technology, because of globalisation, and because of population ageing. Non-routine jobs are in greater demand than routine jobs that are increasingly automated. Just last week, OECD Labour Ministers discussed the implications of these changes in Paris and we are very grateful for Minister Nahles’ support for our very successful Policy Forum on the Future of Work.

 

The discussions confirmed the immense challenges for our education and training systems.  In many ways, Germany’s approach is an international role model; the vocational education system ensures that the transition from school to work for those who attain upper secondary education is both swift and successful. And the system can play a key role in helping the current wave of migrants integrate into the labour market.

 

But there are also some areas for improvement. One of our key concerns is that educational outcomes in Germany remain too closely linked to socio-economic background. Breaking this link will be critical for stemming the rise of inequality in Germany. Moreover, steps are needed to maintain strong employability of graduates from the “Duales Ausbildungssytem” throughout their lifetime. To this end, the skills base of the graduates needs to be broader and integrate even more general competencies.

 

Tertiary graduation rates in Germany remain below the OECD average, even though returns to skills are high. This, combined with Germany’s below-average spending on education, suggests that further investments in education are warranted.

 

Moreover, incentives to participate in life-long learning need also be improved, as we are moving from “life-long employment” to “life-long employability”. This is particularly true for the graduates in Germany’s successful vocational education system. While it provides Germany’s youth with excellent tools to make a good start in professional life, their specific skills can be vulnerable to obsolescence at higher age because of technological change.

 

 

Family 4.0

 

Another key area for more equality and higher growth is gender and family policy.  At almost 70%, female employment rates in Germany are among the highest in the OECD. But German mothers often work short hours while fathers work longer than in many other OECD countries. The cooking, the caring and the cleaning are all still mostly done by women. So the old role model is still in place.

 

The good news is that German policy is moving in the right direction. The reform of parental leave is showing results: almost one in three fathers claimed parental leave allowance in 2013, up from 3.5% in 2006. And the 2015 reform gives financial incentives to both parents to temporarily reduce working hours.

 

I am happy to report that the OECD is currently working with Minister Schwesig on international evidence and policy options for the better sharing of paid and unpaid work between parents. Innovative ideas, such as the proposed “family working time model”, can make a contribution to a better work-life balance and increase the labour supply by helping both parents to work full-time as their children grow up.

 

In addition, the German tax-benefit system has to be reformed. The so called tax-splitting for couples within the income tax still discourages them from sharing paid work equally.  Public investment in early education and care and out-of-school hours care needs to be further strengthened. Good progress has been made but ensuring the participation of disadvantaged families, including recent migrant families, should remain a priority. These children should have equal access to opportunities to give them the best chances for integration.

 

Ladies and Gentlemen,

 

We live in challenging times and have a collective responsibility to deliver results and improve the well-being of our people. Germany has taken many steps in the right direction in recent years, but this should not lead to complacency. Let me put it very clearly here: effective and modern economic and social policy makers need to consider structural reforms as a state of mind.

 

The OECD stands ready to help Germany continue its successful course.

 

Thank you.