The collapse of communism and the re-unification of Germany created other burdens. Companies shifted manufacturing to Poland and the Czech Republic, where wages are one-fifth to one-tenth of those here. Eastern Germany became a drain on the country, swelling its debt burden.
But the more enduring problems have to do with economic reform. Taxes and employer-paid contributions to social security account for about half of a workers' gross wages. Job-protection rules have been relaxed, but they still make it extremely difficult and expensive to lay off workers. Germany's post-war "consensus culture," which pervades everything from labor relations to corporate decision-making, has made change tortuous.
An unemployed person with a family of four is entitled to receive, indefinitely, an income of 74 percent of the average wage. That works out to about US$1,500 a month. Any company with more than three employees can be required to form a "works council," a group of workers who must be consulted on issues ranging from hiring and firing. Larger companies need to follow rules laid down in a 500-page book governing employee issues.
"The sum of these labor laws results in a very strict environment," said Hans-Werner Sinn, director of the IFO institute. Because of high wages and rigid work rules, he said, German companies have over-invested in automation and hired a minimum number of skilled workers at high wages.
"That only makes sense when you are not trying to eliminate jobs," he said. "German firms cut back on their labor force by not employing people. It sounds strange, but Germany needs to create a new sector of low-wage, low-skilled jobs."
With national elections in September, big reforms are unlikely this year.
"In the German psyche, the state is the protector," said Fred Irwin, president of the American Chamber of Commerce in Germany, who has worked here for nearly 30 years. "On the surface, people talk about reforms and lower taxes. But the bottom line is that people don't really want reforms. Regardless of whether it's the Christian Democrats or the Social Democrats in power, there is a consensus around the way things are."
RSS