Germany's Jobless Racket

Simone Richter, 29, has been unemployed since 1997. After being downsized from a public-housing agency, she put herself through half a dozen government-sponsored training courses, from IT for Office Workers to Practical Administrative Skills. They were supposed to beef up her secretarial experience and help her land a job. Instead, she says, listless students spent much of their class time surfing the Net under the eyes of unmotivated instructors. No one she knows has found work.

Half a million Germans are sent by the Labor Bureau to take such courses every year--without any visible effect on Germany's 9.4 percent jobless rate. "They told us from the beginning that we'd never find a job," says Richter. "I have the feeling they're just shuffling us around." If there's one economic sector that's booming around Cottbus, her depressed hometown near Berlin, it's the retraining industry. Thanks to an endless flow of public funds, the third biggest single employer in the region is, in fact, the Labor Bureau itself.

Nothing better symbolizes the rot at the heart of Germany than this monstrous machine that administers the nation's 4 million unemployed. All but useless in getting people back to work, costing more than 50 billion euros a year to maintain, the bureau is a massive drag on taxpayers and the economy. Worse, it conceals the true scale of Germany's malaise. That's because the hundreds of thousands of workers parked in these expensive programs are not counted in the official jobless statistics. Nor are 800,000 jobless welfare cases, or countless older workers lured into early retirement with generous public subsidies. Adjust the numbers for such bookkeeping tricks, and Germany's true unemployment easily hits 6 million or more, a whopping 15 percent of the work force. And that's a modest estimate.

If there's an analog to the Enron accounting scandal in the United States, this is it for Germany. Economists have long called for radical reforms. But the country's leaders aren't paying attention. On Friday the Bundestag in Berlin passed yet another 180 pages of laws that add more red tape to the labor bureaucracy and throw more money at the problem. Chancellor Gerhard Schroder called the legislation a "coup" that would signal a turnaround for Germany's labor market. In fact, experts polled by NEWSWEEK say the measure--like so many others of Germany's asphyxiating regulations--will likely destroy more jobs than it creates.

That's the last thing the country needs. Last week the government's economic advisory panel revised its growth estimate down to 0.2 percent for 2002, putting Germany on the brink of its second recession in a year. Economic activity is taking "a nose dive," warns Wolfgang Franz, head of the Center for European Economic Research in Mannheim. In Brussels, meanwhile, the European Commission began proceedings to punish Germany for its out-of-control government deficit, expected to reach 3.8 percent of GDP this year--a rising tide of red ink fed by huge state payments for unemployment, welfare and pensions.

Amid the growing gloom, Schroder's approval ratings have plummeted. Just two months after getting narrowly re-elected, his Social Democrats now trail the opposition Christian Democrats by 10 points. His frantic party is doing damage control in the only way it knows--by raising taxes for more social spending. Economists fear that will kill any hope of an upturn for Europe's biggest economy.

Germany is not alone in its troubles, of course. Nowhere on the Continent are jobs being created at a rate anywhere close to that in the United States, let alone in more dynamic economies. Yet last week EU labor commissioner Anna Diamantopoulou pooh-poohed the remedy economists have been urging for years: do away with the plethora of rules that stifle hiring and firing, make it less attractive to stay on the dole, stop trying to regulate everything from pay scales to shopping hours. "We don't want American hire-and-fire methods," said Diamantopoulou. Instead, she suggested that lavish training programs like Germany's should be exempt from EU controls that limit runaway spending by member governments. Instead, these programs should be considered valuable "investments."

If only that were true. The German Labor Bureau doesn't keep records on how many of its clients ever find real jobs as a result of the training. But spot checks by government auditors and independent researchers suggest that Germany's unemployment program is less an investment than a gigantic boondoggle. According to the experts, not only does Germany's vast and expensive retraining bureaucracy not help the jobless find work, but often even reduces their chances. Reason: they drop out of the work force so long, learning inappropriate or outdated skills, that they end up being less employable than when they began their retraining. The only ones to benefit, says Andreas Schmidt, a budget expert for the German Taxpayers' Association, are those in the vast "unemployment industry" feeding off the bounty of government largesse.

This vast and opaque bureaucracy has taken on a life of its own. Led by the 93,000-strong Federal Bureau of Labor, an entire industry has grown up to cater to Germany's jobless. Fed by more than 20 billion euros in public funds each year, about 35,000 private and semiprivate companies have sprung up for no other purpose than to run make-work programs, administer courses for the jobless or simply to "park" a few thousand workers while they're paid a full salary not to work. In cities like Leipzig or Dresden, some of the biggest employers are Transfergesellschaften, odd pseudocompanies that employ surplus workers at their normal pay without giving them work to do--yet another variation of the political game that makes unemployment figures appear to be lower than they actually are.

Such absurdities are almost limitless. Popular at training centers these days are courses that turn laid-off industrial workers into event managers, network administrators or florists. The result: a flood of inexperienced applicants in these fields. Tens of thousands of jobless have recently been packed into one-year courses on Web design--never mind that dot-coms aren't hiring and that courses often take place on old PCs using outdated programs. Thomas Kallay, an unemployed programmer shocked by the poor quality of the four IT courses the Labor Bureau sent him to over the last three years, says he tracked down about 100 fellow trainees to check on their job-hunting results. Only two, he says, had found work--and both were fired when their employers discovered their lack of PC skills.

Germany's regulators seem oblivious. The bill passed by the Bundestag last week, for instance, calls for the Labor Bureau to set up hundreds of new "personnel service agencies" designed to hire out federally subsidized workers to companies needing temporary help. But take away the bureaucrats and subsidies, and this is what private temp agencies and personnel recruiters do already. Instead of opening up the highly regulated private temp market--which is how neighboring Netherlands cut unemployment to less than half its former rate--the new law further tightens it, mandating higher union wages for all temporary personnel. The danger, warns Hilmar Schneider, an economist advising the Bundestag's labor committee, is that many of Germany's 800,000 privately registered temporary workers could thus be priced out of the market--no doubt adding to the ranks of those seeking the Labor Bureau's services.

Not for nothing does Marcus Kottman, a labor specialist at Bochum University near Essen, call this a "bureaucratic monster." For politicians of every stripe, socialist or conservative, announcing higher funds to "fight" unemployment has long been an easy way to avoid unpopular labor-market reforms. Corporations like such programs because they allow them to shift surplus workers into subsidized government plans at taxpayers' expense. Labor unions and industry associations like them because they reap much of the financial benefit. Take the case of the Deutsche Angestellten Akademie, for example, a wholly owned subsidiary of Verdi, the powerful service-workers' union. Last year DAA trained 121,000 workers and racked up revenues of 373 million euros, mostly from government funds. Those same unions and industry associations also control the board of the Labor Bureau, which decides how to dole out 22 billion euros for training and make-work each year. There is no oversight, little auditing and almost no competitive bidding.

In some countries, having the same people on both the giving and the receiving end of government largesse might be considered highly suspicious, if not outright illegal. In Germany, that is how the system works, and it isn't about to change. The Labor Bureau has grown to become the single largest bureaucracy in Germany. Coupled with about 150,000 workers in the retraining industry, it is a powerful lobby in its own right--the core of what German labor expert Bernward Brink calls Germany's "welfare-bureaucratic complex." Small wonder that it's largely been immune to reform.

There are at least some signs of progress. Florian Gerster, the new head of the Labor Bureau, acknowledges the need for an overhaul. He ultimately aims to slim down the behemoth. But his first task is to clean up the statistics department. An auditor's secret report, leaked earlier this year, discloses that under Gerster's predecessor, Bernhard Jagoda, the bureau systematically faked its numbers. Of the 3.8 million "placements" it claims to have made last year, more than 70 percent were found to be phony. The whole retraining system, auditors said, was "prone to corruption." As few as one seventh of the workers who passed through the Labor Bureau's programs, it turns out, had found jobs after six months. The question the auditors did not ask was whether the programs, in fact, played any role in getting the jobless back to work.

In the end, it's hard not to escape an obvious conclusion. As long as the government is more interested in shuffling the jobless between useless projects and playing with the numbers instead of tackling real labor market reform, it will be a long time before Germany is working again. Absurd laws such as those passed last week only feed the vicious cycle, in which ever higher taxes to finance ever more spending and ever more bureaucracy destroys more and more jobs. For Germany the choice is stark: cut this monstrosity down to size, or pay the price of stagflation. An underemployed and overtaxed Germany will only drag itself down--and the rest of Europe, too.

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