As a result, these labor-intensive sectors must release a lot of labor and capital, which push into the capital-intensive export sectors that are better able to cope with high wages. But, while these sectors therefore grow especially fast, their high capital intensity means that they cannot fully employ the released labor, with the result that some of the unemployed workers have nowhere to turn but the welfare state.
At the same time, since returns to capital are kept low by high wages, very little investment occurs. The excess of savings over investment flows abroad as capital exports. Economic growth and job creation slow, while exports soar.
Astonishingly, many interpret Germany's export boom and current-account surplus, which measures these capital exports, as an indicator of the strength of Germany as an investment location. But, according to the Bundesbank, net investment abroad (including financial investment) has already roughly matched domestic investment in recent years.
As the international division of labor proceeds further, the import content of German products will continue to increase, which means that rising exports will lead to fewer domestic jobs and less income growth. Unless and until German workers accept the need for greater flexibility in the face of global competition, export profits will continue to be invested abroad, reducing overall production costs -- and reinforcing the bazaar economy at home.
Hans-Werner Sinn is Director of the Ifo Institute for Economic Research in Munich.
Copyright: Project Syndicate
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