NYT Warns of a Looming Crises in Germany: Rising Wages

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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.