From Federal President Horst Köhler

A Ringing Endorsement

German Federal Persident Horst Köhler The "German Miracle" has lately taken on a new meaning: not the admirable one of catapulting a country from the rubble of a ruinous war to the heights of economic development, but one in which Germany manages to be the world's top exporter of goods while simultaneously having more than a tenth of its workforce lying idle. For many years now, the number of unemployed has kept rising relentlessly, topping now five million —the highest number since the early 1930s.

Clearly, something has to be done. Every politician worth his salt acknowledges as much. Only that each political camp has a private recipe for how to tackle the problem, a recipe that tends to be incompatible with those of the other camps and that immediately gets poked full of holes by its rivals.

Until Horst Köhler decided to speak up. As a former head of the International Monetary Fund and holder of a Ph.D. in economics, Germany's Federal President clearly knows what he is talking about when he delves into the economy. As a highly respected statesman that hovers well above day-to-day politics, what he has to say carries unrivalled authority as well.

Needless to say, his speech set government and union officials squealing and crying foul, while opposition ones welcomed it but somehow gave the impression that they felt it might have stolen their thunder somewhat.

What Köhler said, in brief, was that the politicians should leave partisanship aside and get serious about tackling the unemployment problem. And he not only made a succinct, poignant diagnosis, but offered ways out of the quagmire. Among the measures he endorsed was the activating social assistance proposal put forth by Munich's Ifo Institute for Economic Research. To keep you from having to Google your way into what this mysterious proposal is about, here it goes, in pre-digested form.

The Ifo Proposal
Ifo starts by analysing the factors that keep the unemployed sitting at home instead of looking for a job. For one thing, the jobless get a pretty good "minimum wage" paid by the State upon the condition… that they refrain from working. This way, the economy gets doubly hit: first in the State's budget, by having to disburse ever larger sums to provide an income to the ever larger legions of unemployed, and then by forcing a sizable proportion of the workforce away from producing anything.

This poses a further problem: any company wishing to hire a low-skilled worker (the bulk of Germany's unemployed) needs to offer a wage that must perforce be well above the level of social assistance. That makes low-skilled German workers unaffordable and those just across the border quite attractive by contrast. What if the job were offered anyway? Should the putative unemployed person bother to take it up? Usually not. The job-taker would get hit with such a hefty reduction in benefits that his net income would hardly be above the social assistance he was getting. Toiling away for a couple of euros more while you can earn just about the same staying home and doing nothing? Thanks, but no thanks.

So, there you have it: the incentive for the low-skilled jobless to look for a job is as non-existent as the incentive for companies to hire them.

The Ifo proposal elegantly manages to raise the incentive for the unemployed to leave the dole while simultaneously lowering the salaries of the low-skilled enough to make them again attractive to potential employers, all without putting an additional strain on the State's coffers. Too good to be true? Well, let's check out how it would be done.

First, the incentive to look for a job is accomplished by drastically reducing social assistance entitlements for employable persons not holding a job in the private labour market. The new minimum level guaranteed by public welfare payments would be so low that it would only be luring if other income is available.

To open the door to employment in the private labour market, low wages would be subsidised in such a way that the worker becomes more attractive to employers while simultaneously receiving a significantly improved net salary at the end of the month. The mechanism proposed by Ifo would have the added benefit of smoothing out the gross/net income curve, making it easier to climb towards a more satisfactory ratio.

Third, to preserve the social bit so cherished by the German welfare state, the state will offer jobs to those who cannot find them in the regular labour market. The wage for these jobs would be set at such a level that the household income of the recipients would equal the level of social assistance hitherto received. While remaining formally employed by the community, the services of these workers would be offered to the highest-bidding private companies in a manner akin to that of staffing services agencies. This way, these workers would not only be doing something productive instead of just sitting at home, but they also would get a chance to crack open the door towards regular employment in the private sector.

Needless to say, these three steps depend on each other for their effectiveness. The first measure frees up the resources needed for the second one, and the third step serves as a safety net, as envisioned in Germany's constitution, for those who still fail to find a regular job.

So, Köhler appears to have the right instinct by endorsing the Ifo proposal. If adopted and it works as envisioned, Ifo's Activating Social Assistance programme would indeed solve Germany's most intractable problem. That would be a "German Miracle" indeed.