Europe, Tech and War

Read in the Frankfurter Allgemeine Zeitung

English translation:

Europe’s productivity growth lags significantly behind that of the United States. While labor productivity in the U.S. has risen by more than 50 percent since 1995, in Germany it has only increased by 33 percent. At the same time, the German economy finds itself in the midst of a dramatic structural transformation during a period of major technological change.

To meet these challenges, we must make the labor market more dynamic. Rigid labor market rules hinder the economy’s adaptability, and especially those disruptive innovations that drive growth.

Even with the introduction of computers and the internet, Europe clearly lagged behind the U.S. In the past three decades, the IT capital stock in the U.S. has increased tenfold, while in Germany it has only tripled. And today?

“Technology adopted more quickly”

At the BDI’s Industry Day, Bill Gates offered this comparison regarding artificial intelligence: “The big difference will lie in who applies artificial intelligence, not in who invented it. (…) During the digital revolution, the U.S. had a huge advantage, not only because so much was invented there, but because companies overall adopted the technology more quickly.”

Initial survey results show that Europe is also falling behind the U.S. in the use of artificial intelligence: around 35 percent of U.S. employees say they use AI in the workplace, compared to just 26 percent in Germany. Why do German companies find it harder to successfully adopt new technologies?

Thanks to the Hartz reforms

Flexible and dynamic labor markets are an important factor in benefiting from new technologies. They often require new skills, are to some degree disruptive, and overall demand a high level of economic dynamism. Knowledge of new technologies and their applications spreads faster when employees change companies and take their expertise with them.

High labor market flexibility makes it easier for companies to experiment with or develop new technologies: companies are more willing to take the risk of hiring new employees if they know that those employees can later move on to attractive positions elsewhere, or be let go if a technology turns out not to be promising.

Thanks to the Hartz reforms of 2005, Germany significantly restructured unemployment insurance. Unemployment fell considerably. At the same time, however, labor market regulations for employees largely remained unchanged, and in some cases rights were expanded. These include above all employment protection and co-determination rights. Short-time work schemes, which protected Germany from mass unemployment during the COVID crisis, also aim to preserve existing employment contracts.

These measures are reflected in the numbers: every month, 1.2 percent of Germans change employers, whereas in the U.S. 2.3 percent of workers do. A quarter of Germans have been with the same employer for 20 years, but only one-tenth of Americans. At the other end of the spectrum, fewer than 10 percent of Germans are in their first year with their employer, compared to 23 percent of American workers.

Why do Germans change employers less often than Americans?

Long employment relationships have many advantages. For employees, they provide reliability; for companies, they preserve firm-specific knowledge. At the same time, however, this reduces labor market dynamism. That did not matter much when economic growth was fueled mainly by small, incremental innovations, as in the 1970s and 1980s.

But since the 2000s, disruptive “leap innovations” have become increasingly important—and with digitalization and the green transition, this will remain the case in the coming years. Today, countries with a higher share of job changers show higher growth rates—and at the individual level, more frequent job changes over the course of a career tend to be accompanied by higher wage increases.

Why, then, do Germans switch employers less often than Americans? For one thing, employees in Germany often underestimate how much more they could earn at another company. But economic policy rules also play an important role. Two examples: company pensions cannot easily be transferred to new employers, and length of service plays an important role in job protection—while starting a new job usually comes with the risk of a probationary period.

This makes switching jobs unattractive, even when it offers opportunities. Survey results confirm this: Germans cite loss of job security as the main reason against changing employers—even when they expect higher pay. In addition, the culture in Germany, which values reliability and is risk-averse, likely discourages people from daring to change jobs and test their skills with different employers. Instead, the ideal remains a lifelong career at a traditional company.

Reforming the Labor Market to Boost Growth

To increase productivity growth and tackle the massive shifts brought by AI and the transition to green technologies and industries, we need labor market reforms that foster more dynamism. It’s not the specific job that should be protected, but the individual.

Relaxing job protection for highly educated and well-paid workers is worth considering. These individuals are more capable of financially weathering short periods of unemployment—and given Germany’s acute labor and skills shortage, they usually find new jobs quickly.

Periods of structural change require courage, a willingness to shape the future, and a spirit of experimentation. To support that, policymakers must create the right framework—especially in the labor market.

Nicola Fuchs-Schündeln is President of the Berlin Social Science Center (WZB) and Professor of Macroeconomics and Development at Goethe University Frankfurt.

Benjamin Schoefer is Associate Professor in the Department of Economics at the University of California, Berkeley.