Globalization And Wealth Inequality, The German Counter-Case

There are various reasons the wage and wealth gap is growing, but in Europe's strongest economy it makes no sense to blame the global marketplace.

A Porsche factory in Liepzig, Germany
A Porsche factory in Liepzig, Germany
Marcel Fratzscher*


BERLIN — There's not a week that goes by without a headline around the world about people who've lost out in the job market because of globalization.

"Many of our citizens are frustrated by the pace of globalization and feel they are not experiencing the benefits of international trade," British Prime Minister Theresa May recently said at the G20 meeting in China.

In reality, globalization is not responsible for social inequality and insecurity. It's just an easy excuse by politicians to cover their own mistakes.

Germany was, and still is, one of the biggest winners of globalization. The country proudly calls itself the world export champion. Without the competition and innovation of German companies, the economic miracle after World War II would not have been possible. Germany is one of the world's wealthiest countries, with one of the highest per capita incomes.

Opponents of globalization are right to criticize Germany's growing inequality. There's a lack of social mobility in Germany. It's one of the countries with the highest wage and wealth gaps.

On top of that, a growing number of people are experiencing increasing insecurity in their life. What does insecurity mean? It refers to people not knowing if they will still have a job a couple of years from now, if their children will have a better life than they've had, and if, in their later years, they will benefit from a pension system or fall into poverty.

It's true that the German joint association of assistance stipulates financial support for the unemployed and that more Germans are starting to depend on state handouts. But social and economic advancement remains problematic even as people, especially women, find employment.

A recent OECD study finds that global trade and financial markets have not contributed to the augmented wage inequalities in industrialized countries since the 1990s. Instead, three other potential reasons were identified: Technological change, the weakening of national and global institutions, and failures of the education system.

A look at Germany confirms this theory. The part of the workforce that's least well-paid, who have seen its real income decrease over the last two decades, work in service industries like cleaning, gastronomy or healthcare, in jobs that can neither be outsourced to India or China. These people are employed in precarious work conditions and worry about their job and wages in the future.

The highest wages and best jobs, on the other hand, can be found in export companies (auto manufacturers, engineering firms, drug makers) that are in a tough global competition. This tough environment forces these companies to be innovative. They make their workforce benefit from technological change in order to be productive.

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The good life in Ketzen, Germany — Photo: Onnola

The reason for jobs with low wages in Germany is not global competition but rather the lack of it. The federal government has been criticized for years by international institutions like the International Monetary Fund for failing to reform service industries. Eventually, less competition means poor investment and reduced efficiency and thereby, less productivity, fewer jobs and lower wages.

Another reason for inequality is the weakening of institutions like trade unions. People who earn minimum wage in Germany are often those whose wages and work conditions are not determined by collective bargaining. And that's how the gap between "insiders" and "outsiders" on the labor market has widened in the past.

The result is strong polarization of German society and the labor market. The part of society that is actively taking part in globalization benefits from good jobs and high income. The rest fall behind.

National politics play an important role when it comes to the functioning of markets and institutions. The government should heed the warnings of international institutions and economists seriously and break down the dominant status of companies in some service industries and reinforce labor market institutions.

The last reason for inequality in Germany is child poverty, which is slowly increasing. Almost 2 million children were dependent on the state in 2015. Children do not have equal opportunities. There are ways to fix this. More all-day schools, focusing on children and teenagers with a difficult social background and more investments in early childhood education will help mitigate this problem.

The current German education system doesn't fit into an increasingly globalized world. International institutions have raised this problem with the government for many years. So far these warnings have been ignored.

*Marcel Fratzscher is the president of the Berlin-based German Institute for Economic Research

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