Thayer Watkins
Silicon Valley
& Tornado Alley

The Emergence of the German
Welfare State as of 1981

This material describes the transition of the perception of Germany having the miracle economy to one with a social welfare state.

In the period of after World War II Germany created a system which was called the social market economy. German labor recognized that if Germany was to recover as an industrial power German labor would have to forego wages and benefit increases. The relatively The stable labor-management conditions enabled Germany to recover its place in industrial markets. Unemployment was so low that Germany had to draw in a labor force from other countries.

Eventually German wage began to rise. In 1970 the cost of labor, including fringe benefits, per hour of work in Germany was about 60 percent of what it was in the U.S. By 1980 the German labor cost was about 25 percent higher than in the U.S.

German governments enacted a package of social welfare programs that were extremely generous. By 1980 a German worker if ill could get as much as six week of sick leave at full pay and 80 percent of pay for time off beyond six weeks. The feeling was that these social welfare programs were not a risk because German workers, being inherently hardworking by nature, would not make unnecessary use of them. Despite the German work ethic absenteeism amounted to 8.4 percent of scheduled work time compared to an absenteeism rate of 3.5 percent in the U.S.

The cost of these social welfare programs showed up in the government budget. In 1960 the cost of such programs was $15 billion. By 1980 this figure was up to $250 billion, which amounted to $4000 per person in West Germany. This cost amounted about 30 percent of GDP.

The West German budget was deficit. This deficit was not only due to the social welfare progams. The government has been increasing its employment. The net result is that the public-sector share of output from 38 percent in 1970 to 47 percent in 1980.

The Finance Minister of the Federal Republic of Germany (West Germany), Hans Matthöfer, remarked

Germany is living beyond its means.

In 1980 West Germany had a record deficit in international transactions. This was due to several factors:

Germany of course survived its economic and financial difficulties of 1981. The point however is that the economic and financial problems of the present day existed twenty five years ago. The weaknesses in the German economic model were known but ignored.

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