The German labour markets: the case for more flexibility

Abstract

A framework of different labour market segments is introduced to describe the stylised facts of the German labour market. Two processes, the outsourcing of production to Middle and Eastern Europe and the transfer of jobs to the shadow economy, are distinguished, which are eroding the formerly favourable labour market situation in Germany. It is argued that the shadow economy cannot operate as a substitute for the regular economy if the latter is put under strain and more flexibility is required. The framework used here seems to be in broad agreement with the stylised facts, showing that the process of adjustment has resulted mainly in changes to employment and the (official) GDP rather than to wages. Finally, the paper deals with the consequences that may arise if the recent emergence of selective wage concessions turns into a reduction in overall wage levels.