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.

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