Economic Reform and the Political Economy
of the German Welfare State
WOLFGANG STREECK and CHRISTINE TRAMPUSCH
The central problem of the German economy is the high costs of labour, driven
up by the burden of funding an extensive welfare state through social insurance
contributions that operate as payroll taxes on employment. The study identifies
the political causes of the long-term rise in non-wage labour costs. It analyses
the reforms of the last decade, showing how the multiplicity of veto points
in the German political economy has weakened reform initiatives and reduced
the prospect for effective reform in the foreseeable future.
Contrary to widespread belief, the German economy does not suffer from a lack of
international competitiveness.1 Despite the high value of the euro, the trade surplus
continues to rise. Employment in exposed sectors, while declining as elsewhere, con-
tinues to exceed that in any comparable country, indicating that German industry has
maintained its outstanding competitive performance. Industrial wages are high, but are
offset by high and fast-rising productivity.2
Nor does the German economy face particular difficulties with respect to inter-
nationalisation. Notwithstanding employment protection, co-determination and high
wage levels, inward foreign investment remains buoyant, attracted by an excellent
infrastructure, a high skill workforce and peaceful labour relations.3 German firms
have substantially expanded their activities abroad in order to compete for market
share. During the past decade, firms like Siemens, BASF, BMW, Volkswagen,
Daimler-Benz, and Hoechst, have evolved into true multinationals. Well into the
1990s, the domestic employment effects of outward investment have been generally
benevolent. A decline in low-skilled jobs has been compensated by growth in high-
skilled employment,
resulting in an upgrading of the employment structure
with only minor losses in the volume of employment.4
Nevertheless, there is a severe and worsening employment problem, and it is here