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Home Publications Blogs Beat the Press NYT Warns of a Looming Crises in Germany: Rising Wages

NYT Warns of a Looming Crises in Germany: Rising Wages

Tuesday, 13 August 2013 21:05

The NYT devoted an article to Germany's declining population, which it warns may lead to a "major labor shortage" according to unnamed experts. The piece warns that this is not only a potential crisis for Germany, but in fact all of Europe, telling readers:

"There is little doubt about the urgency of the crisis for Europe."

The piece is confused throughout, apparently misunderstanding the way markets work. At one point it tells readers that German employers have "hundreds of thousands of skilled jobs unfilled." In fact this just means that these employers are unwilling to pay the market wage for these jobs.

That happens all the time as economies evolve. The reason that half of the U.S. workforce does not work in agriculture is that farmers had millions of jobs unfilled because workers could get better paying jobs in cities. The farmers that went out of business were undoubtedly made unhappy by being unable to get low cost labor for their farms, but it's unlikely the NYT called it a crisis as it was happening.

If the labor market tightens in response to a declining population then low productivity jobs will go unfilled. For example, there will be fewer clerks in retail stores to assist customers and many restaurants will close since restaurant workers will be able to get higher wages. If the jobs that are unfilled are important to the economy, then presumably employers will offer higher wages and be able to pull workers away from other jobs or persuade more workers to get the skills necessary for the positions.

The other misleading fear story in this picture is the idea that a declining working age population will not be able to support a larger population of retirees:

"There are about four workers for every pensioner in the European Union. By 2060, the average will drop to two, according to the European Union’s 2012 report on aging."

This is bizarre for several reasons. First, right now Europe is suffering enormously because it has way too many workers to support its population of retirees, which is why countries like Spain and Italy have double-digit unemployment (25 percent in the case of Spain). It's understandable that labor shortages would not figure prominently as a concern to many Europeans just now.

However, the underlying arithmetic here is also misleading. Countries have dealt with declining ratios of workers to retirees for close to a century, and for the most part without much difficulty. In the United States the ratio fell from 5 to 1 in 1960 to just 2.8 to 1 in 2012. This did not prevent large improvements in living standards for both workers and retirees. It is hard to see why a comparable drop in the next 50 years in the European Union would lead to serious disruptions. (Actually it is surprising that the ratio of workers to retirees is so much higher in Europe than the United States since the EU does have an older population.)

Simple arithmetic shows that the impact of productivity growth will swamp the impact of demographics. If a retiree gets 80 percent of the income of an average worker, then it is necessary to have a tax rate (or its equivalent) of just under 17 percent on workers when the ratio of workers to retiree is 4 to 1. The necessary tax rate would be a bit less than 29 percent if the ratio is just 2 to 1.

If the country is able to maintain just a 1.5 percent rate of productivity growth over this 50 year period (the pace of growth during the slowdown period in the United States) and wages keep pace with productivity growth, then before tax wages will be 110 percent higher in 2062 than they are today. This would leave after-tax wages more than 80 percent higher than today. It's difficult to see why Europeans should be viewing this as a crisis. 

Comments (12)Add Comment
Fire the synapses
written by Robert, August 13, 2013 11:15
This is a nice post and I think liberals can grasp the class agenda on display in NYT articles about "labor shortages" in Germany and Japan that raise wages and have positive externalities with respect to the environment. What's missing is a connection to the United States and the fact that the NYT is cheering for an immigration overhaul expected to add tens of millions of people. Why shouldn't it be the obligation of German workers to accept lower wages so that their employers can have higher profits? Surely they could import cheaper labor from Southern Europe, Africa, and South America. It's time for liberals to realize that it's not fair for rich man A to take money from the pocket of working class man B and split it between himself and third world man C. If the NYT and wealthy backers of groups like "forward us" want to help the third world then they should do it with their own money.
Robert...no adding people...
written by pete, August 14, 2013 3:39
In fact the plan as now drafted would require more id checking, reducing the ability of the underground economy to function. As in USSR, the US has a massive underground economy. At least 11M or so folks are off the grid, allowing them to work. They do not qualify for unemployment, and other benefits, so must line up for jobs. Increased enforcement will create at least several million unemployed, not more workers. The simple economics are that more production will be shifted overseas. Currently even some medical evaluations, accounting, and other services are being shipped out. We cannot export our lawnmowing and nannying and construction, so these will just get more expensive, and drive more folks to mow their own lawn and cut back on construction.

Looking country by country is the wrong methodology going forward. Nationalism was very evil in the 20th Century, and I hope it can be avoided. Instead a global view sees the huge capital/labor imbalances, and seeks a quick end to them, either allowing folks to work here, at competitive instead of monopoly wages, and/or shipping the capital overseas. Anything else is nearsighted.
Fantasy assumptions
written by Ecomedian, August 14, 2013 6:23
"...and wages keep up with productivity growth..."

Ah, to be an academic economist who can handwave about wages being magically coupled to productivity growth, when this has clearly not been the case for thirty years. Without this assumption the entire position is bunk, and we do have to worry about retirees-per-worker.

Extra credit for claiming that the unemployed represent excess retiree-supporting-units.
written by medgeek, August 14, 2013 6:38
This comment is unfair. Dean has pointed out on multiple occasions that workers' pay has not kept up with productivity growth in the last few decades, resulting in a large shift from labor to capital, and contributing in large measure to rising inequality.
Stupid Liberals Strike Out Again: Immigration Caused Great Recession, Middle Class Destruction and Cancer
written by Last Mover, August 14, 2013 6:52
Why shouldn't it be the obligation of German workers to accept lower wages so that their employers can have higher profits?

This comment above is a version of economic race baiting, blaming immigrants for taking American jobs and wages so employers can get rich off the difference.

As if the economic predators of the 1% who run the country with tens of trillions in wealth got that way by playing off immigrants against resident Americans by creating a labor surplus.

Among the other ways the predators rose to the top to crush the 99% was to take over the media and create these myths, precisely to divert attention and reporting away from the true sources of power:

Market failure by design.

Market power over competition by design.

Government failure by design.

Privatized gains, socialized losses by design.

Diversion of unearned productivity gains from labor to the 1% by design.

Manipulation of all the above to exploit the great recession by blaming it on government rather the private sector.

Go ahead. Knock yourselves out with the zero sum brainwashing on how immigrants prevent American workers from getting jobs and higher wages. After all, that's how the middle class grew to the success it was before it was destroyed, right? By blocking immigration all those years to create shortages that forced employers to pay more and receive less for the themselves from a fixed amount of profit.

Stupid liberals.
mdgeek reverse causality
written by pete, August 14, 2013 9:15
High US wages relative to the rest of the word forced increase use of capital here....this seems easily obvious. Look at clothing manufacturing etc. With sufficiently productive capital, some workers can be used. Is it the worker who is productive or the capital? Or the inventor of the robot etc? I say keep the work here, open the borders and drop the payroll tax, and other impediments to hiring. Outrageous that there is 20% effective unemployment, 33% youth unemployment, and folks are asking for higher wages. Wow. This is a strange twist of logic, Orwellian in sense. All workers are equal, but some are more equal than others.
Wages and Productivity
written by Dean, August 14, 2013 10:59

I've written endlessly about wages not keeping pace with productivity. That is the point. If we are worried about the living standards of people 20,30, or 40 years from now, inequality is what we should be focused on. The demographic story is a distraction.
written by Kat, August 14, 2013 3:16

I think the above was for ecomedian?

(Sorry to be picky, but I would not want an opinion that I did not state attributed to me.)
If Wages Keep Pace with Productivity Growth
written by gary fitzgerald, August 14, 2013 3:39
Considering wages haven't kept pace with productivity growth for the past 30 years and the plutocrats who control the government are committed to keeping things that way, the NYT article makes perfect sense. The real crisis is whether wages will keep pace with productivity. If yes, then no crisis. If no, then major crisis. If the article where to focus on this fact then people might start looking at the relationship between wages and productivity growth and start demanding that government do something to insure that wages keep pace with productivity growth. This is something the plutocrats and their media (NYT) do not want and so it's always assumed that it won't happen. Based on this assumption, there is no need to bring it up. If only we had an independent press not beholden to the plutocrats.
Pension = portion of wages, not received
written by Xelcho, August 14, 2013 4:08
Dean and others,

In every situation I have studied, pensions represent a portion of wages that are not received in favor of some future benefit. If in fact this is true then the whole discussion is moot as no worker is supporting anyone other than themselves. If this is not true please provide sources as I find unsupported opinions are like assholes, except you can have more than one.
Yes, my comment was directed at Ecomedian
written by Dean, August 14, 2013 7:57
Thanks Kat, and apologies to Medgeek
written by watermelonpunch, August 14, 2013 10:40
Xelcho: I wondered about that too when I read this.
Pensions are another form of pay... just like employer health care insurance. But I'm not sure how its viewed by some people. And there seems to be confusion about "other people's pay" or, also, other people's pensions, by extension.

It brings to mind when I hear people who make somewhere in the ballpark of $16/hr or less, concerned that if the minimum wage is raised to $10/hr, it means they're getting a pay cut, and they're hopping mad about that, because why should those other people get a raise when they're only making $14/hr?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.