Life is good for Germany's economy. But is it good for Germans?

When President Obama stood in Berlin today and said that budget balancing must not trump the priority of improving lives, some saw a dig at German Chancellor Angela Merkel, who has led the call for austerity across Europe.

But it is ordinary citizens like Markus Sillah, an electrician, who might be offended – those who say that the country of Germany might be doing well, but the people of Germany aren’t necessarily.

Overseeing the renovation of an apartment complex in a posh neighborhood of Berlin last month, Mr. Sillah explains that he can’t afford to buy his own apartment, or a car. Still, he says he feels fortunate that he has a permanent contract – many of the construction workers with whom he works are just hired per project and barely make ends meet.

“Why, if you work eight hours a day, don’t you earn enough to live on? That makes no sense to me,” he says.

Germany is the model in Europe these days, with low unemployment and robust growth. Its success is manifold, but part of it is due to tough reforms the country undertook a decade ago, when it was the so-called “sick man of Europe.” Outside of Germany, Europeans look on its success with envy, as they suffer record high unemployment and crippling austerity measures – for which they also blame Germany. But inside the country, not all workers feel enriched by the boom, and many feel left behind.

“The government tells the people, ‘this is the best government the people have ever had, with the lowest unemployment,’” says Gero Neugebauer, a political scientist at Berlin's Free University. “We do have less unemployment. But we have more people that had to accept to be paid on average less than they were paid in their jobs before."

While unemployment has reached record highs in the European Union – at over 12 percent – in Germany it stands at just 6.8 percent. In the midst of financial crisis, Germany has seen among its strongest employment figures in 20 years.

Agenda 2010

Many have called upon the European Union, whose economic policies are led by Germany, to loosen their demands for budget slashing. Obama said today: "All of us have to make sure that our budgets are not out of control. All of us have to undergo structural reforms to adapt to a new and highly competitive economy.”

He added: "What's true though is that all of us also have to focus on growth and we have to make sure that in pursuit of our longer-term policies ... we don't lose sight of our main goal, which is to make the lives of our people better.”

But many Germans have said that before they are willing to help, they want to see today's ailing countries make the same sacrifices they did a decade ago.

After reunification of East and West, Germany struggled in the 1990s with an inflexible labor market and generous unemployment benefits that acted as a disincentive to enter the labor force. At the same time, Germans realized the country must adjust to the new realities of globalization or its export-driven economy would fail.

In 2003, a reform package called Agenda 2010 was set out to resolve the problem. It included wage restraints, more flexible labor laws, and changes to unemployment benefits that pushed Germans into the labor force. It is considered the biggest change to social welfare in Germany since World War II.

At the time there was haggling over specific policies – and deep divides formed within the Social Democratic Party (SPD), which was at the helm when the agenda was pushed through – but there was consensus on the inevitability of reform. “There was a broad general understanding that Germany needed to focus on competition, and needed lower wages to keep up with the rest of the world,” says Ferdinand Fichtner, an economist at the German Institute for Economic Research (DIW) in Berlin.

It is not the only reason that Germany’s economy is doing well today. A cheaper euro keeps its export industry competitive. And low fertility rates mean there are fewer workers for plentiful jobs, even if in the long term that could pose problems for the pension system and skilled labor, says Michael Wohlgemuth, director of Open Europe Berlin.  

But Agenda 2010 is considered a major driver of Germany’s success today, he says. “It created incentives to work.” And that low unemployment benefits everyone.

A 'mini-job' trap?

But not all believe that the type of jobs that Germans are doing is creating a socially just society.

“Mini-jobs,” for example, were created during the reforms and now employ 7.4 million Germans. They allow companies to hire workers on a part-time basis outside of the obligations of permanent contracts, and countries like Spain are looking at them as a way out of their economic crisis. The jobs, which garner up to 450 euros a month non-taxed, are intended to transition workers to formal contracts, especially for the under-educated, and provide options for those, like students or women at home, seeking part-time work.

But about 14 percent of workers are in marginal employment, according to Germany’s ministry of labor and social affairs. And many have complained that the system fosters a segment of the population that gets stuck in low-paid work. The EU, in its country-wide recommendations issued last month, said Germany should further its efforts to improve transitions from contracts like mini-jobs, “thus avoiding labor market segmentation.”

While overall wages in Germany have gone up since 2003, German businesses' profits have gone up much further. That means that in relative terms, workers feel they are worse off today, says Fichtner.

Germany is feeling increasing pressure from outside the country to raise its wages as a way to boost German consumption and level out competition across the European Union. According to the figures from Germany’s Institute for Work, Skills and Training, the share of employees earning less than two-thirds of the average hourly wage, by OECD standards, increased between 2000 and 2007 from 20 to 24 percent, standing at 23 percent today.

And a recent report from the International Labor Organization showed that quality jobs in Germany have decreased. The employment rates increased by 1.5 percentage points between 2010 and 2011, at the same time that involuntary temporary employment has risen by 1 percent.

Political ramifications

Wages have also become a central issue in September’s federal elections. Germany has no national minimum wage, hailing from a long-standing notion that unions could negotiate proper wages in each industry.

The idea of a national minimum was floated in the last election cycle but has been picked up more forcefully by Ms. Merkel’s rival, Peer Steinbruck of the center-left SPD. “They realized they had to pick up something that could be used to show people that there is a distinction between [the parties],” says Dr. Neugebauer.

But their message is not resonating, and Merkel's center-right Christian Democratic Union still leads in the polls. That’s in part because now most parties have adopted a minimum wage as part of their platforms. “There is an understanding that now is the time to end the hardships and distribute the benefits of [Germany’s] success,” says Dr. Wohlgemuth. 

The issue also doesn’t automatically translate into votes for the Social Democrats because they were in power when Agenda 2010 was pushed through, so some on the left question their commitment to social welfare, says Neugebauer.

Further, they face ambivalence among voters. Christian Mueller pedals tourists around the center of Berlin, a job he’s done since 2001. He says he sees the same money in his pocket as he did ten years ago, but with inflation, he makes less.

It's a common complaint, says Ulrike Guerot of the European Council of Foreign Relations in Berlin. “The man in the streets knows and resents this,” she says, and ideas of “social justice” are becoming an increasingly common theme as the campaign heats up.

But Mr. Mueller, for example, isn’t sure setting a minimum wage is the answer. “I am underpaid,” he says. “But look at the situation in France. They have a minimum wage. It could be the reason they are declining.”

Sillah expresses those same uncertainties. “The scissors have been opened further between rich and poor,” he says. But is he mad about that? “The reforms were necessary.”