Every few years, a national polling institute asks Germans what they want most from their society. Each time, a majority--or close to it--answers Gleichheit, or equality. It is the supreme good, more highly prized in Germany even than Freiheit, freedom. Indeed, Germans' vision of equality--spreading the country's wealth, eliminating capitalist-class barriers, creating a prosperous and socially open meritocracy--has, over the decades, become the very foundation of their modern welfare state.

How ironic, then, that Gleichheit has in recent years turned on itself. The very institutions meant to bring about equality are now doing precisely the opposite--creating new inequalities, killing opportunity and erecting fresh barriers to social advancement. Institutionalized mass unemployment, a direct result of the phasing out of low-wage jobs in the name of Gleichheit, has created families where two or three generations live off government handouts. Rigid labor laws protect well-off jobholders from having to compete with the jobless. The famous craftsmen's guilds that were supposed to ensure quality for customers as well as a decent living for their members have more and more come to resemble exclusive clubs, shutting down competition and killing hundreds of thousands of potential jobs. And the country's failure to provide sufficient education and employment opportunities for its huge immigrant population has created potentially the most explosive underclass of all.

All this is not new. It is part of a common clutch of problems that Europe's welfare states are grappling with, from France to Finland. What's different, however, is the growing realization of just how miserably Germany's ideal of an equitable and meritocratic society is failing. Recent months have brought a slew of studies that show Germany to be one of the least upwardly mobile places in the industrialized world. A new report by the Organization for Economic Cooperation and Development in Paris is especially shocking. When it comes to breaking through class barriers, getting a university education or landing a white-collar job, it reveals, working-class German kids face extraordinary disadvantages. It's no surprise that homogenous nations like Japan or South Korea lead the world in leveling the social playing field for their citizens. But it's astonishing that Germany should lag well behind such places as Russia, Thailand and Mexico--not to mention Albania and Peru.

According to the OECD, there is a strong correlation between class (as measured by parents' education and income) and achievement. Of 41 countries surveyed, lower-class kids in Germany were the least likely to do well in school, making them less likely to progress beyond their parents' rank in society. "In Germany, which social class you come from is more important [in predicting an individual's future] than in all the other countries we looked at," says the study's chief author, Andreas Schleicher.

Of all the institutions limiting upward mobility in Germany, the most pernicious is the education system. From Singapore to Sweden, other developed countries have been modernizing schools and universities for decades, investing money and broadly raising standards. Germany's schoolteachers are the highest paid in the world--yet in many ways the country remains stuck in another age. As in the late 1800s, its three-tiered school system divides kids up at the age of 10, when students are selected either for pre-university study, for the professional trades or for a rudimentary education preparing them for only the most basic jobs. Once assigned, their "career choice" is all but cemented; few students ever switch tracks.

As if this weren't bad enough, those who make the selection--grade-school teachers, not parents or the kids themselves--often base their choice more on the parents' socioeconomic background than any assessment of a student's potential. "The child of a broomsweep has to get astronomical grades to make it, while someone from an academic household doesn't even need to be average," says Rainer Lehmann, education professor at Berlin's Humboldt University and author of a landmark study tracking 12,000 schoolchildren in Hamburg. Only 8 percent of German children whose parents did not attend university go on to college themselves--a staggeringly low percentage in contrast to America, where the comparable figure is closer to 54 percent.

Everywhere in the system, the cards seem to be stacked against kids born on the wrong side of the tracks. While university education, which benefits mostly the upper classes, is free, kindergartens cost money--a fact that places disproportionate burdens on lower-income families, even when they can manage to find a scarce place in class. While much of Europe has raised preschool standards, Germany's old-fashioned kindergartens still tend to keep kids playing and sleeping instead of giving them a start on early learning. Either way, poor kids miss an early opportunity to catch up.

Ditto for elementary school: alone in Europe, Germany sends pupils home at noon, exposing them to the equalizing effects of education only a couple of hours a day. Children of immigrants are especially cut off; they get neither an academic head start nor the language training and socialization on which their future depends. By the time the selection comes around, divisions are all but fixed. "Instead of reducing social stratification, our school system increases it," says Lehmann. "It's a national scandal."

Educational inequalities are compounded by other barriers. Kids stuck in the lowest-rung high schools--the notorious Hauptschule--face a horrendous dropout rate and often don't learn even the most basic math or reading skills necessary to start, say, an apprenticeship program as a hotel waitress or car mechanic. As a result, they're significantly more likely than their upper-track peers to end up unemployed. And once jobless, chances are high that the German labor bureaucracy will shuffle them around in useless make-work programs or ineffective training courses rather than find them jobs. Germany's labor laws and union rules aggravate the problem. Simply put, few companies can afford to pay union wages for unskilled laborers.

Social mobility drives achievement and innovation. Shutting talented poor kids out of a better education is a huge drag on Germany's economic potential. "Nine out of 10 children today will one day work in the knowledge economy," the OECD's Schleicher says, "and Germany is not preparing them for it." Because Germany is still funneling its lower classes into lower-track schools, there aren't enough professional-school and college grads to staff the growing IT and service sectors. While high-tech Finland sends a whopping 71 percent of its high-school grads to university, Germany barely manages 30 percent, far below the OECD average of 45 percent. Facing a worsening shortage of qualified workers, employers' associations such as the IT industry's BitKomm have been calling for a major overhaul of schools and universities for years. If nothing is done, BitKomm warns, Germany will end up importing immigrant engineers and other specialists while the unemployment ranks swell with low-skilled Germans.

German officials remain largely in denial. Most continue to tout the country's strong points, such as the vocational training system for crafts and trades that has historically kept Germany's youth-unemployment rate one of the world's lowest. A few important changes are in the works. National academic standards are being introduced in the schools, with better testing to monitor the results. Still, some of the country's worst institutions--among them, the three-hour grade school and the patently unfair three-tier-tracking system--are so ingrained as to appear sacrosanct. International studies have called attention to the scandal. But until Germans get serious--and re-examine some of their most precious institutions--their visions of equality will recede ever farther from reality.