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German Joblessness Grows
Subject Unemployment
Topic International Finance, Employment, Unemployment, and Inflation
Key Words Employment, Unemployment, Exports, GDP, Budget Deficit, Labor Force
News Story

Recession in the United States has an important impact on the economy of many nations. Exports are an important part of Germany's economy and the U.S. recession has reduced the demand for German exports, leading to a slowdown in the German economy. Unemployment rose to over 4 million people and a two-year high rate of 10.4 percent in January. December's unemployment rate was 9.6 percent. Politically, the increase in unemployment was a blow to German Chancellor Gerhard Schröder who had promised to hold unemployment below 3.5 million.

Germany is experiencing a number of difficulties as a result of its economic slowdown. Government spending has increased faster than revenues, resulting in a growing budget deficit that has brought Germany close to the limit of 3 percent of gross domestic product set by the European Economic Union. The EEU wants to issue a formal warning to Germany because of its deficit. Ironically, it was Germany under then Chancellor Helmut Kohl who had sought the deficit limit, fearing that fiscal restraint would be a problem in other countries and lead to an unstable euro.

Germany's unemployed increased to 4.289 million in January. Adjusting for the weather and other seasonal factors, unemployment stood at 3.978 million. While the number of unemployed increased, there were an estimated 422,425 jobs that remained vacant. Industry spokesmen allege that the large number of unfilled vacancies is the result of a very generous unemployment compensation program that induces people to remain unemployed rather than take low-paying or undesirable jobs.

Mr. Schröder has tried to implement labor market reforms during his tenure, without success. Unions are very powerful in Germany and are currently seeking pay increases that are more than twice the rate of inflation.

(Updated March 20, 2002)

Questions
1. How do higher unemployment benefits result in higher unemployment?
2. Are there alternative explanations as to why a large number of vacancies exist at the same time as a large number of unemployed? Explain.
3. Germany's economy has been affected by the U.S. slowdown. Explain how a recession in the U.S. could impact Germany.
Source Steven Erlanger, "German Unemployment is Growing Problem for Schröder," The New York Times, February 7, 2002.

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