Germany’s welfare state: Dropping the pilot

Date: 31/01/04

Fall-out from the sacking of a labour-agency head

FINALLY, directors who take their jobs seriously? On January 24th the supervisory board of Germany's Federal Labour Agency fired its boss, Florian Gerster. He had lost the board's trust, it was said, by spending millions on a new office, signing fishy consulting contracts and displaying a political tin ear. Alas, the sacking is not, in fact, an example of good governance at work. On the contrary, it is one more sign that Germany badly needs to change how its welfare state is run.

The Federal Labour Agency is a prime example of German corporatism, with origins going back as far as Bismarck. The agency is run not by the government alone, as are its equivalents in other countries, but jointly with trade unions and employers. Government, labour and business nominate seven members apiece to its federal board. That ratio is replicated at each of 180 local labour agencies, so that in total almost 2,200 directors watch over some 90,000 employees.

Although bloated, this self-government has more or less worked in the past. It has also reflected the agency's financing: employers and employees contribute equally to unemployment insurance, with tax money making up the rest of the agency's €53 billion ($66 billion) annual budget. But with membership of trade unions, as well as of employers' associations, in steep decline, and with ever more Germans without a job (unemployment is 4.3m, or 10.4%), the agency's organisation now seems both outdated and inefficient.

Critics claim that non-government directors tend to defend their organisations' interests, particularly in the billions spent on retraining, most of which goes to firms owned either by unions or by employers' associations. Worse, the agency has become a bureaucratic behemoth that is bad at helping job-seekers in today's market. Dissatisfaction with the agency's performance came to a head in 2002, when it emerged that it was common practice to falsify job-placement figures.

Enter Mr Gerster, a former social-affairs minister in Rhineland-Palatinate. His mission was to turn the agency into a modern service provider that treats the unemployed as customers, not as objects to be managed. Apparently he did a good job - which upset both the interest-groups and opposition Christian Democrats, who do not want the government to succeed in reforming labour markets. But Mr Gerster's political awkwardness also made it easy for his foes, by judicious leaking, to build a media campaign against him.

Some are now calling for the abolition of the agency - and even the scrapping of the federal unemployment-insurance fund (if workers simply saved the 6.5% of gross wages that employers and employees now each contribute, that could give the newly jobless enough of a cushion to get through several months of unemployment). But such radical reforms are unlikely to happen soon, says Jurgen Donges, an economics professor at Cologne University. Instead, he argues, the agency's supervisory board should no longer represent interest-groups, but be composed of independent experts.

Whether Mr Gerster's dismissal will lead to such a change may depend on the outcome of an unrelated pay dispute in Germany's engineering industries. That will show if trade unions are willing to be more responsible about exploiting their power. IG Metall, Germany's giant engineering union, staged warning strikes this week. The sticking-point is not so much pay as an “opening clause”, demanded by employers, that would allow companies to vary the length of the working week between 35 and 40 hours, so as to adapt wage costs to market conditions.

The debate about the labour agency could also spill into other parts of the welfare state. In health care, for instance, insurance-company associations and doctors wield too much influence - and have recently watered down reforms. If Germany's much-touted structural reforms are ever to work their magic, many more elements of its old-fashioned corporatist structures may have to go.

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