Germany’s Super Strong Labor Market

Though production statistics indicates that Germany’s economy is weakening, labor market statistics contradicts this.

The unemployment rate is now only 4.9%, the lowest in decades and also the lowest in the EU. Furthermore, the employment to population ratio is at an all time high and has risen 1% the latest year.

And unlike in some other countries with rising employment, such as Britain and Japan, this has not been achieved at the cost of falling real wages. Quite to the contrary, German workers are enjoying steady gains in real wages.

Average wages/salaries rose 3.6% in nominal terms in the year to the third quarter, or about 3% in real terms. That was partly due to temporary bonuses, but even excluding bonuses, average pay rose 2.7% in nominal terms or about 2% in real terms.

So how German workers do so much better than production statistics indicates? There are basically three possible explanations:

1) Labor income is increasing as part of national income at the expense of corporate profits.
2) Production statistics exaggerate the weakness of the economy.
3) Labor market statistics exaggerate the strength of the labor market.

National income statistics seems to refute the applicability in this case of the first explanation as profits increases at roughly the same rate as labor income.

Instead, the likely explanation is 2), as national income statistics show a great improvement in German terms of trade. GDP numbers are misleading whenever terms of trade change significantly.


Japanese Recession Shows That Consumption Taxes Are Harmful Too

A common myth among economists is that unlike income taxes or payroll taxes, consumption taxes are harmless or almost harmless. That is however not true as consumption taxes reduce the benefit of a higher income and hurt the producers who sell the products.

Illustrating that consumption taxes are also harmful, Japan has seen its GDP drop by more than 2% since they raised its sales tax from 5% to 8%.

Japan should try to reduce its budget deficit, but that should be done in a way that doesn’t reduce incentives, which is to say it should be done by cutting government spending.

Cheap Oil Illustrates The Error Of Deflationphobia

Despite the fact that the supply of oil is limited in several oil producing countries either due to civil war (Libya, Syria, Iraq) or sanctions (Iran), the price of oil just keeps falling.

This is in part due to weak demand in for example Europe, and in part due to the increase in U.S. oil production.

This will benefit for example troubled economies in southern Europe, like Greece, as they will pay less for their oil imports and so have money that they can use to spend on other things-or pay off their debts.

But if you were to believe deflationphobes this is really bad news as this will lower price indexes and thus aggravate the “problem” of deflation. Pro-inflatonist ideology presents what is clearly a gain for these countries as a problem, illustrating how wrong this ideology is.