War For Talent: Germany

Talent shortages are already back in the German news. Yesterday, I took an initial swipe at understanding the resiliency of Germany's economy and labor market. Today, I have some facts to support my hypothesis. Labor costs are one consideration:

French Finance Minister Christine Lagarde could hardly have been clearer in her interview with the Financial Times two weeks ago. Germany, she said, should increase domestic demand to help struggling European Union countries improve their competitiveness.

In addition to slamming Berlin for its export surplus, Lagarde also said: "When you look at unit labor costs in Germany, they have done a tremendous job (keeping them low). I'm not sure it is a sustainable model for the long term and for the whole of the (euro) group. Clearly we need better convergence." ...

... And despite the good news from the unemployment office, German workers would appear to be the losers of last year's developments on the wage front. The Federal Statistical Office this week announced that real wages, which have been falling in Germany for years, dropped a further 0.4 percent in 2008.

There is a price to be paid for an export-oriented economy. Germany is not an exception to the rule. Its manufacturing sector has to be globally cost competitive.

The second, and more important, consideration is the size of the talent pool. Germany has much less slack in labor supply. Demography is at the heart of the problem:

Germany, a highly industrialized nation dependent on its technical expertise, extends only a limited welcome to qualified foreigners. But it is an immigration policy which threatens to gamble away the country's future. For years, German politicians have wasted valuable time in an international competition for talent with their half-hearted immigration and integration policies. And now, just as the country seems to have emerged from a major crisis, the alarmists are issuing new warnings. In a knowledge-based society, well-trained people are the most important and scarcest form of capital. While other industrialized nations have been courting skilled foreign workers for years, Germany has discouraged these highly qualified people and continues to do so today. Now, however, globalization, demographic changes and economic demands require a new, modern immigration policy. The country doesn't have much time left to change its policies.

German companies are already complaining about a lack of skilled workers. According to the German Association for Information Technology (BITKOM), the industry is currently seeking 20,000 IT specialists. And the Association of German Engineers (VDI) says that Germany needs 35,000 more engineers than are currently available. The shortage applies to all sectors.

The German Federal Employment Agency notes that the current need for skilled workers extends beyond computer specialists and technicians. Lathe operators, metal workers, grinders, social workers, nurses and nursing home workers are also in short supply.

The Expert Council of German Foundations on Integration and Migration (SVR) estimates that the German economy is already losing about €20 billion ($26 billion) in value a year as a result of these developments. And the dilemma isn't even all that new. Germans have been discussing the biggest problem -- demographic change -- for decades, but now it has suddenly arrived.

The population is shrinking drastically. When the first baby boomers retire starting in 2015, the older Germans leaving the work force will likely outnumber young people just entering the labor market.

Keep that last paragraph in mind when reading the following from Richard Longworth about why the Rust Belt should embrace the German Way:

Unions really do dominate in Germany. No less than 80 percent of the export and manufacturing industries are unionized. This leads to those well-known "labor rigidities," nearly amounting to jobs for life.

One criticism of this system through the years has been its guarantees of job stability for older workers, making it that much harder for companies to hire younger workers. This should create a generational clash, with high levels of youth unemployment.

But as we've seen, that hasn't happened. Youth unemployment in Germany is lower than it is here. The reason, Geoghegan and others say, is the German apprenticeship situation. Young Germans often leave school at 16, go into an apprenticeship at a local company, and from there into a job.

I wouldn't expect union labor rigidities with so many skilled workers leaving the workforce and so few young adults entering it, casting serious doubt on the role the apprenticeship model in solving the rigidity problem.

I look at Germany as an example of poor talent management policy, not a beacon of hope for a struggling Rust Belt. We would be better off discussing Richard Herman's book, "Immigrant, Inc." The Rust Belt needs a talent attraction policy much more than an industrial policy. Germany is the harbinger of things to come:

State cabinet ministers are also ignoring Merkel's directive. The lack of skilled employees is "an important obstacle to growth for companies, as we face a global competition for brainpower," says Ernst Pfister, a member of the FDP and economics minister for the southwestern state of Baden-Württemberg. Pfister believes that Germany's Immigration Act still contains too many hurdles. Uwe Schünemann, the interior minister of the northwestern state of Lower Saxony and a member of Merkel's CDU, says: "If we want highly qualified employees to come to Germany from other countries, we must significantly improve the conditions whereby they find employment here."

Politicians in eastern Germany are also worried that their companies could suffer from a shortage of candidates with academic degrees. "In Saxony, the demographic shift is kicking in earlier than in other states," says the state's interior minister, Markus Ulbig (CDU). Only 10 years from now, one in three residents of Saxony will be older than 65. "These sobering facts show that there is no getting around qualified immigration," says Ulbig.

He wants to make studying at German universities more attractive to foreign students, as well as to significantly reduce the high minimum salary levels at which highly qualified workers must be hired under current rules. Ulbig also believes that there is a need to reform residency laws, which continue to deter many foreign specialists.

Even in manufacturing, the least common denominator is talent. The last round of globalization was all about the flows of financial capital. The coming round of globalization will be defined by the flows of human capital. The sooner Rust Belt cities wake up to this new landscape, the better.