Challenges the German economy is facing under the current government

Essay by AVBUniversity, Master'sA-, March 2004

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The natural rate of unemployment in Germany

Chancellor Schröder is confronted with multiple problems in Germanys current economic situation:

* Rising unemployment numbers

* High "non-wage-labor costs" of 42%

* Inefficient and too expensive public services

To really combat unemployment efficiently, Schröder has to tackle all three main factors influencing the rise in unemployment in Germany (as in all European countries):

1. The natural rate of unemployment

2. The frictional unemployment

3. The structural unemployment

These three factors are mainly due to:

1. shift in demand towards better skilled employees, because of technological change and the generous unemployment programs. Higher unemployment is also due to the current general down-turn in the European and world economy.

2. difficulties in matching workers with appropriate jobs

3. wage rigidity and union power

Schröder's "Agenda 2010 tries to affect two dynamic parameters of our "unemployment model" basing on the natural rate of unemployment::

f should be positively influenced by:

1. Enhancing the job search through:

a. Cutting unemployment benefits, in order to motivate people to really look for a job

b. Lowering hurdles for craftsmen to start on their own, by abolishing the "Meister" requirement

c. Making governmental employment agencies more effective

d. To be more supportive to the entrepreneurship

2. Loosening wage rigidity through:

a. Easing job protection with a choice between fixed compensation and court recourse allowing small companies more flexibility to hire and fire.

b. Adjusting wages to their appropriate equilibrium through collective bargain-ing, making labor less expensive

This may lower s with the employers having to cut costs on the other hand.

Further measures are taken by reforming the educational system, in order to prepare new and current workers for the higher requirements asked in our technically more sophisti-cated economy, in the sense of the sectoral shift.

Not mentioned...