German unemployment leaps to post-war high

Records were tumbling in Germany again yesterday as unemployment leapt to a new post-war high, registering the biggest monthly increase since the early 1930s.

The headline unemployment figure rose by half-a-million, but even the seasonally adjusted total for January stood at 4.317 million - an increase of 160,000 from December. The rise was three times what analysts had forecast, and pushed the adjusted unemployment rate to 11.3 per cent.

Britain's Trade Secretary, Ian Lang, seized on the figures, claiming that they showed European social policies were not working. Mr Lang said: "It is a total vindication of the Prime Minister's warning to Europe on Tuesday that continental social policies are destroying jobs, while in Conservative Britain we are creating them."

However, economists disagree about how far the German unemployment problem is a result of labour market rigidities rather than the continued impact of unification, or the effort to meet the Maastricht criteria. Furthermore, the theory that deregulation has improved Britain's employment performance in the long run remains to be proven.

Much of last month's increase in German unemployment is attributed to the cold spell in January which affected the construction industry for most of the month. Bernhard Jagoda, head of the Federal Labour Office, said: "This figure cannot be made to look good, but it should also be recognised that the situation in January contains seasonal unemployment, and it follows that in spring we can reckon with a clear reduction."

However, there are indications that the long-awaited recovery might not be as powerful as predicted, slowing the prospects for employment growth later in the year.

British Conservative politicians are not the only ones to blame persistent high unemployment in Germany on labour market policies. Even the Bundesbank president, Hans Tietmeyer, has argued recently that Germany and other European countries need to tackle labour market rigidities.

Gilles St Paul, research fellow of the Centre for Economic Policy Research, said: "The US and the UK have more flexible labour markets. In downturns unemployment rises very quickly. But the US seems to have avoided the ever-increasing trends in unemployment that continental European countries have seen."

Juan Jimeno, also a CEPR research fellow, claims union power, job security legislation and unemployment benefits all contribute to keeping European unemployment high.

But Professor Richard Layard at the LSE's Centre for Economic Performance said: "The German system is not deplorably rigid; the German economy remains fundamentally one of the healthiest economies in the world. Unemployment is high because Germany is still at the bottom of the cycle, after an inflationary boom in the early Nineties."

In a new book, What Labour Can Do, to be published next week, Professor Layard argues that the German economy is still adjusting to the huge transfer of wealth, investment and jobs from west to east. Czech and Polish markets opening up to the east have provided a further competitive drain on new jobs and investment in Germany, to which the German economy is only just starting to respond.

Moreover, there is no conclusive evidence yet that the UK version of deregulation has improved its employment performance relative to Germany. Alan Manning, of the Centre for Economic Performance explains: "What we don't yet know is how far UK unemployment will fall before inflation picks up again."

Even the UK government's own Labour Market Trends concluded in December that "the UK has performed better in the Nineties upturn than it did in the 1980s".

Mr St Paul SAYS: "The UK is a bit of a mystery. The real problem is the number of very unskilled - there are fewer of them in France or Germany."

Some economists believe continental unemployment has also been held up by tight monetary and fiscal policy in Europe as countries try to meet the Maastricht criteria.

Others claim the Maastricht timetable gives countries an incentive to sort out their economies in a hurry. Speaking to the CBI in London yesterday, EU Commissioner Yves-Thibault de Silguy said: "There is no doubt that the EMU timetable is helping to maintain the pace of economic reform."

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