On the brink of recession: Why Germany can’t get its productivity problem under control

AI, digitalization, robots – the increasing technologization of the world of work should be an enormous driver for the productivity of the German economy. But it’s not. Why? What then needs to change so that the world of work is more efficient and the economy grows again?

Robots assemble cars and drive through production lines. Employees communicate from locations around the world via Slack, Zoom and Teams. And instead of walking through three supermarkets, Germans can have their favorite products delivered directly to their front door the next day with just a few clicks. For many, it feels like we are all becoming more and more productive. And Germany is known abroad as the world champion in productivity.

But the impression is deceptive. The medium-term growth prospects are at a “historic low,” said Martin Werding, one of the so-called economic sages, at an event by those same sages in June. There is a lack of “productivity gains”. At the turn of the millennium, productivity growth was still just under 1.0 percent of GDP. 2010 at 0.6 percent. This year at 0.3 percent. And so, regardless of the constant ups and downs of the global economy, the economy would hardly be able to grow anyway.

Why productivity growth is crucial

The numbers paint a pessimistic outlook for Germany’s future as a business location. But why is productivity no longer growing despite constant new inventions in one of the world’s strongest industrialized countries? And can things be turned around somehow?

First of all, what is important is that the German economy will not grow without more productivity. According to a model by Nobel Prize winner Robert Solow, as every economics student learns, the economy grows when the factors of production increase. So, to put it simply, there is more growth for every hour people spend at work and every machine that helps them do it. Or the gross domestic product grows because people produce more with their machines in the same time, i.e. become more productive. And since capital investments in Germany are unlikely to increase and the working population will even decline in the coming years, productivity is what could still grow and move the country forward.

Leaps in technology and the end of dynamics

It used to be easy. After the Second World War, Germany was in ruins. When VW Beetles rolled off the assembly line, more people got better education and the famous 1950s houses were built, productivity also increased.

The potential for productivity growth also depends on how well the country was doing before – similar to a dilapidated property that real estate agents like to advertise as a house with “a lot of potential”, this also applies to economies that are not yet very productive.

There are further spurts in so-called technological leaps. There was one in the 1990s, when computers and the Internet became widespread and dramatically simplified communication.

Securing people instead of jobs

But in 2016, when productivity growth across the EU had been dragging from one low point to the next for several years, it forced the member states to set up committees to increase productivity. Since then, economists have been asked to adjust the adjustment screws instead of engineers. And so every year across Europe, economics professors meet with business representatives and politicians for productivity dialogues to discuss why productivity growth is so low and how productivity could be increased.

“During the financial crisis and during the Covid-19 pandemic, many companies in Germany successfully retained skilled workers so that they could get started again as soon as demand increased or the supply chains were functioning again,” says Professor Werding. Companies hoarded workers who were then not available to other industries. However, they cannot use their skills where they would be most productive.

Often there is simply a lack of local industries in which there are still major increases in productivity. “Sectors that used to have stronger productivity growth, such as mechanical and vehicle construction, have not disappeared, but are now developing less dynamically,” says Werding. Added to this is demographic change. “Mixed-age teams prove to be particularly productive,” says Werding. The older ones have experience. The younger ones have fresh specialist knowledge. “The problem with demographic change is that experienced workers still like to retire early, while it is becoming increasingly difficult to find younger people.”

Jan Mischke, partner at the McKinsey Global Institute, also recently looked at the lack of production growth in various countries. It needs to become easier to place employees in the most productive roles and areas, he says. “The focus should be on supporting people in training and looking for new jobs, rather than maintaining jobs that do not appear to be competitive in the long term,” said Mischke.

“The current lack of investment is more than understandable”

He believes it is important for Germany to focus more on economic areas in which growth and productivity are higher. These included robotics and biotechnology. In addition, artificial intelligence must be used across all industries and thus also make less produced industries more productive. “For this to happen, the return prospects must be attractive for domestic and foreign investors.”

But for this to happen, the general conditions in Germany must change. There is a lack of investment. Non-wage labor costs are rising because the aging population is driving up social security contributions. Uncertainty about the future of energy supply and the development of energy prices also held back investments in innovations, says Professor Werding. “The current lack of investment is more than understandable,” he sums up.

Economic experts have known about all of the adjustments that need to be made in order for productivity to grow for years. They repeat it in their productivity dialogues and in new studies: people and machines must be used in the right jobs and industries, employees must receive good training and politicians must make Germany attractive for future investments. But even if the problems and their solutions have been identified for years, the same applies for the near future: Talking about productivity is easier than making an entire country more productive.

The article first appeared at Capital.de

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