Reforms, Macroeconomic Policy and Economic Performance in Germany

42 Pages Posted: 29 May 2008

See all articles by Wendy Carlin

Wendy Carlin

University College London - Department of Economics; Centre for Economic Policy Research (CEPR)

David Soskice

WZB Berlin Social Science Center

Date Written: August 2007

Abstract

The conventional diagnosis of Germany's poor economic performance focuses on supply-side weaknesses and the need for more vigorous reforms to make low-skill labour markets more flexible. We question this on both theoretical and empirical grounds. In an extended version of a New Keynesian model shifts in aggregate demand can move the economy along a range of constant-inflation medium-run unemployment equilibria. The evolution of the real exchange rate and the external balance help to identify whether aggregate supply or aggregate demand shifts have been dominant in accounting for changes in unemployment. We provide some prima facie evidence for Germany and the UK that aggregate demand factors have played an important role in sustaining growth in the UK and weakening it in Germany over the medium run. We show that Germany has a relatively strong record in implementing OECD recommended reforms but the expected employment effects in low-skill service sectors appear disappointing and poverty has increased. By contrast, it is in high productivity sectors including services that the German economy has performed well, especially in exports. Here labour markets are not flexible in the conventional sense: codetermination, vocational training, and coordinated wage bargaining are important. We pursue the implications of these claims for the design and political economy of reforms in Germany.

Keywords: aggregate demand, German economic performance, labour market reforms, macroeconomic policy

JEL Classification: E65, J59

Suggested Citation

Carlin, Wendy and Soskice, David, Reforms, Macroeconomic Policy and Economic Performance in Germany (August 2007). , Vol. , pp. -, 2007. Available at SSRN: https://ssrn.com/abstract=1138528

Wendy Carlin (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 20 7679 5858 (Phone)
+44 20 7916 2775 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Soskice

WZB Berlin Social Science Center ( email )

Reichpietschufer 50
D-10785 Berlin
Germany
49 30 2549 1105 (Phone)
49 30 2549 1480 (Fax)

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