Comparing Germany to Italy

The German economy stands in sharp contrast to the rest of Europe. For example, unemployment, which has been troublesome for many of the other economies in Europe, is approaching its lowest level in 30 years, coming in at 6.7 percent in January. German unemployment has been decreasing steadily for about the last two and a half years. Recently, total German employment increased by 1.3 percent, which brought the number of jobs to a record 41.25 million. The flexibility of the labor market in recent years could be caused by the so-called Hartz reform. This labor reform first came into effect in early January 2005, focusing on the extreme flexibility of the job market. The Hartz reform began with the deregulation of labor laws. The reform was intended to create a more flexible labor market. It was believed that its implementation would improve conditions for small businesses and make it more attractive for companies to hire new employees. Among the most important innovations was the strong push towards the creation of more part-time jobs. In 1991, 25 percent of the German workforce was part time; now that figure stands at 42 percent. It is interesting to compare the situation in Germany to Italy. The Italian labor market is characterized by its rigidity. In Italy it is not uncommon for an individual to stay with a single company for the duration of their career. However, this lack of mobility limits the creation of new jobs. A debate currently rages in Italy about the decline of the concept of a “permanent” job. The debate was partially triggered by a controversial statement from the Italian Prime Minister in which he criticized the concept of workers being able to stay with a single firm their entire lives. The metalworkers union IG Metall (3.3 million members) is proposing that the average wage be increased by 6.5 percent. The union argues that this increase in wages would actually boost employment by increasing the spending power of Italian workers. According to François Cabau, an economist at Barclays Capital, the gap between the German economy and other Eurozone countries should increase this year. It will interesting to see what effect this divergence has on the Eurozone going forward.