Wednesday, May 15, 2013

Germany's Great GDP-Labor Market Divergence

Germany's first quarter GDP number was less bad than those for France, Italy and Spain, and not surprisingly considering that, also less bad than for the euro area as a whole, but it was still pretty weak with GDP rising only 0.1% compared to the previous quarter and contracting by 0.3% compared to Q1 2012.

But despite the alleged 0.3% yearly economic contraction, employment was actually up by 0.7% compared to Q1 2012, and up by about 0.25% compared to Q4 2012.  But how can employment rise if production falls?

One possible explanation is that productivity is falling. That has been the main explanation for why Britain until the most recent months (in recent months employment has started to drop again in Britain) had a relatively high employment growth of nearly 2% while GDP growth was zero. This was reflected in the fact that average real wages dropped at a 2% rate.

But in Germany, real wages aren't falling, they're rising at a rate of nearly 1%, something that would suggest rising productivity.

This leaves us with two possibilities. One is that the GDP numbers underestimate true economic strength by not adjusting for terms of trade gains and the other is that German corporate profits are falling. My guess is that it's probably a combination of the two.


Blogger Kapitalist said...

I don't like the expression "productivity is falling". It sounds as if German engineers are suddenly producing less per hour. Instead, it's rather that less productive jobs are added. The aggregated average in itself does not contain any useful information. So it's welcome that you reason about what is actually happening in the real world.

10:35 AM  
Blogger stefankarlsson said...

I don't see why "falling productivity" in the context of discussing economies imply producing less units per hour. It could just as well imply falling terms of trade for high productivity sectors and/or higher employment relatively in low productivity sectors. At any rate, these distinctions are of only limited relevance when explaining divergences between GDP and employment numbers.

7:58 PM  
Blogger jeppen said...

Could the falling GDP have something to do with the "energiewende", i.e. the large expenditures on extremely expensive solar electricity, as well as the big capital destruction inherent in closing functioning nuclear power plants?

10:11 PM  

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