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Executive Summary

The German labour market is one of the four key determinants of economic welfare. In this paper the role of the state and the state acting on the labour market will be discussed. Firstly it will be shown, which assignment has been given to the state within the German law. Secondly the instruments of monetary and fiscal policy will be shown as well as individual governmental activities, which have impact on the German labour market. In a further step, current governmental activities will be assessed whether they are able to decrease unemployment or not. In particular, it will be shown that instruments increases overall economic demand, reducing labour time or regulating labour market do not lead to increased economic welfare but increasing unemployment.

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Table of  Contents  

  EXECUTIVE SUMMARY  2

TABLE OF  CONTENTS  3

  LIST OF FIGURES  4

1  INTRODUCTION  5

2  THE ECONOMIC SYSTEM  6

3  OBJECTIVES OF ECONOMIC POLICY  7

4  INSTRUMENTS OF ECONOMIC POLICY  9

5  THE ROLE OF THE STATE IN LABOUR MARKET  11

5.1  Economic situation on German labour market  11

5.2  Reasons of Unemployment  12

5.3  Economic Assessment of governmental instruments  13

5.3.1  Wages  13

5.3.2  Labour time  14

5.3.3  Dismissal protections  16

6  CONCLUSION  17

  BIBLIOGRAPHY  19

  IT-MCHECKLISTE  22

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List of figures

Figure 1: Governmental objectives.....................................................................................8

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1 Introduction Today’s economy is characterized by unemployment, recession, a fluctuating level of prices, varying social needs and other negative aspects on citizens. Nowadays governments play an important role in the economy. 1 Governments spend huge parts of their Gross Domestic Product for social transfers or individual subsidies. 2 Expressing solidarity among the citizens governments try to redistribute income from “the lucky ones” to the “needy ones”. The state tries to achieve social and economic objectives, which help the citizen within the economic process. Due to socio-political reasons the autonomous market process is corrected by the state. 3 The state also acts as a big consumer to purchase buildings, to construct roads, railways and to employ public employees. To effort all these performances the governments raise taxes, fees, charges or raise their level of debts. Like anyone else, the governments do have bounded budgets for their activities. This might often lead to a vicious circle. As more debt means more debt service the need to borrow more money is evident. Most governments are currently indebted to foreigners or to the private sector. This consequently leads to extensive savings that have impact on socio-political objectives by the state. All these activities must be very well balanced. These instruments are highly observed by the German publicity whether these instruments achieve a growth in economic welfare or not. 4

This assignment looks at the economic role of the state in Germany and how it fulfils its tasks. The objective of this assignment is to show the role of the German state, it’s sociopolitical objectives and the possible instruments, which might be used to achieve its objectives. Due to the complexity of possible actions by the state, the impact of particular instruments on the German labour market will be shown and discussed if they lead to desirable results.

1 Cp. Unknown (2004): Deutschland – ein Land im Umbruch, p. 961 – 962.

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For an overview of current Gross domestic product statistics cp. OECD (2006).

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This already implies a kind of assessment of the autonomous market processes. This will be explained

later on.

4

Cp. Unknown (2006): Deutsche Lohnkosten weltweit auf Platz drei; Wefers (2006); Münchau (2006);

Schiermeyer (2006); Sommer (2006).

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2 The Economic System From the institutional economic perspective the Economic System includes formal and informal institutions with economic transactions. The transactions remit ownership and property rights and lead to transaction costs, which have an impact on economic events. 5 The state’s objective is to administrate the distribution of these ownerships and these property rights. In other words, the state’s objective is to reduce rising transaction costs between economic units. The existing transaction costs should be relatively small within the economy. The more opposition against the Economic System the more transaction costs, that will have an impact on decreasing economic welfare. 6

So, the Economic System represents the framework for all governmental and economical activities. Although the German constitution is neutral regarding the Economic System, there are plenty of rules, which favour a social market-economy. Due to several rules, the planned economy is considered as implausible. Rules like freedom of trade, private properties or the right to built up unions refer to free market-economy. 7 In Addition, the Theory of social market economy 8 combines socialism and free market-economy. It was the attempt to bound unbridled capitalism and perfectly driven socialism by competition and individual initiatives by the citizen. The effects, which increased the welfare, should be utilized to finance social compensation within the Economic System. 9 Within the social market-economy the state only adopts the administrative function to provide minimalistic conditions. 10 The state should implement a working legal system, which allows the economic units to act within default rules. Furthermore the operativeness of the market can only be guaranteed with further conditions like a working monetary system. And to avert inequity the state redistributes the outcome of the market “fairly”. 11 Although these functions have impact on the economy, the state is not supposed to act as an economic unit itself.

Nowadays the state is not limited to global actions but acts selective and affects special economic sectors like mining, shipbuilding or the steel industry. In the present day the

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In the dimension of the new institutional economy, economical actions are not technical processes only but transactions between individuals. Transaction costs include search- and informationcosts, bargaining costs and Policing and enforcement costs. Cp. Klump (2006), p. 176. For further information about new institutional economics cp. Richter/ Furubotn (1999); Baron/ Kreps (1999); Williamson (1993).

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Cp. Klump (2006), p. 197.

7

Cp. Altmann (2000), p. 13.

8

Originally the term “Soziale Marktwirtschaft” was coined by Alfred Müller-Armach. Cp. Klump (2006), p. 192.

9

Cp. Klump (2006), p. 192.

10

Cp. Altmann (2000), p. 18.