More Germans are at risk of severe poverty than ever before

Just how poorly the Eurozone is performing is usually illustrated with reference to Greece, then Spain, then Italy and Portugal. The weakest links among the Member States. Not to mention Cyprus, Finland and then some. But the other way of looking at the same question is to focus on the strongest link in the currency union – Germany. A new report from DIW Berlin (German Institute for Economic Research) (released July 5, 2017) – Einkommensschichten und Erwerbsformen seit 1995 (Income levels and forms of employment since 1995), which is only available in German, tells a pretty sombre, if not bleak story as to what has been happening in the Eurozone’s powerhouse over the last 18 years. It demonstrates that not only is the German model wrong for the rest of the Member States, but it is also not generating sound outcomes for its own citizens – well the lower- and middle-classes to be more exact.

I have written about why the German approach is not a suitable economic model to follow, including the following:

1. The German model is not workable for the Eurozone.

2. Germany is not a model for Europe – it fails abroad and at home.

3. German trade surpluses demonstrate the failure of the Eurozone.

4. Germany should look at itself in the mirror.

The latest research from DIW Berlin (cited above) provides more evidence, which support my position.

In what follows I provide my translation rather than the original text. Where quotes are made they are direct translations rather than putting the German text into my own words.

The DIW research notes that:

The distribution of disposable incomes and the types of employment have changed significantly in Germany over the last two decades.

Their research seeks to examine this evolution since 1995.

The study used the Sozio-oekonomisches Panel (SOEP) longitudinal micro dataset for Germany which was recorded annually from 1984 (West) and since 1990 for the unified Germany.

This is an excellent data set, which I have used myself when studying the impacts of the Hartz reforms in Germany. See – Labour Reform and Labour Mobility within Cities: have the Hartz reforms succeeded?.

They choose to examine the income distribution in terms of the number of people with low, medium and high incomes (“niedrige, mittlere oder hohe Einkommen”).

They express these categories relative to the median of the population and define a poverty risk threshold (“Einbeziehung der Armutsrisikoschwelle”) as 60 per cent of the average net household income of the total population.

They find that:

1. The share of workers in the population who are classified as “poverty stricken (“Armutsbedrohten”) has increased. The number of people in severe poverty (less than 46 per cent of the median income) has increased considerably since the end of the 1990s.

2. The share of high income workers has increased.

3. Low-paid employment is now higher than it was 20 years ago. The proportion of low-income workers has increased from 24.4 per cent to 33.7 per cent and the share of low-wage workers rose from 16.7 per cent to 24.5 per cent. The share of of low-wage workers has remained relatively stable since about 2007.

The Hartz reforms, which started in 2003, accelerated the casualisation of the labour market and the precariousness of work increased. Hartz II introduced new types of employment, the ‘mini-job’ and the ‘midi-job’ and there was a sharp fall in regular employment as a consequence.

Mini-jobs provide marginal employment with no security or entitlements and allow workers to earn up to 450 euros per month without paying taxes, while the on-costs for employers are significantly lower. The no tax obligations also mean that the worker receives no social security protection or pension entitlements.

The neo-liberal interpretation of these changes is that Germany underwent a ‘jobwunder’, or jobs miracle.

However the speedy increase in employment can also be viewed less optimistically.

The following graph charts the history of the mini-jobs since 2003. In June 2017, there were 7.4 million ‘mini-jobs’, which represented around 16 per cent of the labour force between 15 and 64 years of age.

As the DIW study found, this proportion has been fairly steady since late 2007 after a rapid increase in the earlier years of the scheme.

The rapid increase in mini-jobs meant an increasing (and sizeable) proportion of the German workforce were forced to work in precarious jobs with extremely low pay and were excluded from enjoying the benefits of national income growth and the chance to accumulate pension entitlements.

4. DIW also found that in the higher-income categories more people have regular jobs.

5. Despite the rise in employment, income inequality is higher than 20 years ago, with the main shifts occurring between 1995 and 2005.

6. The proportion of those with median income (grouped as 77 per cent to 130 per cent of the median) has fallen by 6 percentage points over the two decades (from 47.8 per cent to 41.4 per cent).

7. There are now more people (29 per cent) with incomes below 77 per cent of the median. In 1995, this proportion was 25 per cent.

8. The share of those with over 169 per cent of the median has risen from 12 to 14 per cent.

9. Labour force participation has grown significantly since 1995, particularly among women and the elderly.

10. Standard working conditions have increasingly given way to what they term atypical employment (minijobs etc).

These shifts include an increase of workers employed for less than 15 hours a week, a rise in temporary jobs, a rise in self-employed, and a rise in other forms of non-standard (low-wage) employment.

Taken together, these trends indicate a declining quality of work in terms of security of tenure, ability to gain higher pay and protect conditions, and capacity to have discretion in the workplace.

DIW conclude that:

Insgesamt machen diese Entwicklungen deutlich, dass der erfreuliche Beschäftigungsanstieg der vergangenen Jahre nicht alle gleich erreicht hat und alleine nicht ausreichen dürfte, um allen in der Gesellschaft Wohlstand und Teilhabe zu ermöglichen

“All in all, these developments make it clear that the pleasing rise in employment over the past few years has not been spread equally and has not been sufficient to enable everyone in society to achieve prosperity and participation”.

In tracing the rise in income inequality, they produce the following Table (their “Tabelle 1”).

The headings are:

• “Verfügbares Haushaltseinkommen” – Disposable household income.
• “Haushaltsmarkteinkommen ohne Renten” – Household income before taxes and transfers.
• “Haushaltsmarkteinkommen mit Renten” – Household income after taxes and transfers.
• “Reduktion der Ungleichheit durch Sozialstaatliche Umverteilung” – Reduction in income inequality due to the social redistribution system.

The Gini coefficient is a measure of inequality (higher values indicate rising inequality). A Gini of 1 indicates 1 person has all the income, 0 indicates the income spread evenly)

We observe that the overall Gini coefficient has risen from an average of 0.25 between 1995-1999 to 0.29 between 2014-15. That is a large jump. We should put that figure in context. The US has a Gini coefficient of 0.46. the UK 0.33, Australia 0.35, France 0.33, Italy 0.35.

The other interesting thing about Table 1 is that while the redistributive effect of the taxes and transfer system in Germany has a significant role in reducing inequality that impact has declined over the period analysed.

But the report notes that the rising income inequality is not the result of significant changes in the taxes and transfer system but rather “profound changes in the labour market (“Vielmehr hat die Zunahme der Einkommensungleichheit mit tief- greifenden Veränderungen am Arbeitsmarkt zu tun”)

These profound labour market changes include:

1. The employment rate (employment as a per cent of working age population) for 25 to 64 year olds, has risen continuously from almost 70 percent to about 80 per cent between the periods 1995-99 and 2014-15.

2. For males, the rate has increased from 79 per cent to 84 per cent.

3. For women, the rate has increased from 57 per cent to 73 per cent.

4. Another feature is the rising employment rates for older workers – the 55-64 age group has risen from 41 to 64 per cent between 1995 and 2015.

I thought this Table (Tabelle 4 in the DIW Report) was very interesting. It shows the proportion of people who have remained in their current labour force state after three years or passed (in per cent).

The labour force categories are:

1. Reguläres Arbeitsverhältnis – Regular employment (gaining social security protection etc).

2. Atypisches Arbeitsverhältnis – Atypical employment (outside of usual protections).

3. Erwerbslos – Unemployed.

4. Ausbildung – Participation in Education.

5. Nichterwerbstätige – Not in labour force.

So, for example, over the period 1995-1999, 80.5 per cent of workers who were in regular employment in 1995 remained that way by 1999, whereas in the most recent period 2010-2013, the proportion had risen to 83.9 per cent.

Workers stuck in Aytpical jobs increased dramatically over the entire period. In 1995, 49.6 per cent of these workers remained that way in 1999. But by 2010, 55.9 per cent were stuck in that category by 2013.

Further over the period the chances of an Aytpical worker transitioning to Regular employment fell slightly.

There was also inertia among the unemployed. Earlier 39.8 per cent of jobless workers would remain in that state after three years. By 2010-13, that proportion had risen to 46.1 per cent and the chances of exiting unemployment into regular employment had dropped.

It was more likely an unemployed worker would re-enter employment in an atypical job (such as a mini-job).

Conclusion

Overall, the DIW study reveals that while Germany has been able to expand its total employment rate (so employment has grown more quickly than the underlying population), the quality of work has declined and income inequality has risen.

Moreover, the incidence of poverty and severe poverty has risen sharply.

There has been a concerted attack on the German “middle class” as the distribution of jobs has polarised.

Fewer people now enjoy the benefits and security of regular employment.

More Germans are now vulnerable to precarious employment, income insecurity and single-income families in particular are exposed to a much higher risk of poverty.

It doesn’t look like a success story to me.

And meanwhile German capitalists are increasingly finding ways to penetrate Eastern European labour markets to hasten the attack on working (and living) standards in within Germany.

The big bully has built a house of cards for its own people. Crazy really.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.