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Schroder Re-Election Campaign in Shreds
Subject Comparative statics
Topic Labor markets
Key Words Unemployment, growth, jobs, workers, wages, labor force, labor market regulations, laws, costs, unions, tax cuts, energy taxes
News Story

The re-election chances of Chancellor Gerhard Schroder of Germany are looking increasingly bleak as unemployment rises. Schroder blames September 11 for a slowing of economic growth to 0.75 percent. Public spending cannot be increased significantly because the rules of the euro monetary system mandate firm limits on budget deficits.

In response, the Chancellor has announced measures to help pay low-paid workers' dues to insurance and health funds, which can be as high as 20 percent of wages. The hope is that more unemployed people will be induced to enter the employed labor force in low-paid positions.

German employers have urged the liberalization of labor market regulations that make it costly to dismiss workers. They believe that archaic laws, red tape and high costs prevent foreign companies investing in Germany. However, Schroder has turned the appeals down, instead proposing to give unions more power in major companies.

The conservative opposition leader, Edmund Stoiber, advocates keeping foreigners out of the country. He would also reverse the phasing out of nuclear power, give tax cuts, and eliminate increases in energy taxes.


(Updated April 1, 2002)

Questions
1. Draw a supply and demand diagram of the German labor market. Show unemployment at the reigning wage rate.
a) If Chancellor Schroder had the freedom to increase public spending, how would that affect unemployment? Illustrate on your diagram and explain what you have drawn.
b) Schroder gave unions more power in companies. How would that likely have affected the demand for labor curve and the level of unemployment? How would it likely have affected the wage rate and the level of unemployment?
2. a) Use the concept of the reservation wage to explain how Schroder's welfare and insurance policy could reduce unemployment.
b) How might reducing the cost of insurance and welfare dues for lower-paid workers affect the wage level and the level of unemployment? Illustrate on another labor market diagram.
3. The leader of the opposition has alternative proposals. In a further labor market diagram, illustrate how the following measures would affect the curves and the level of unemployment. Explain your reasoning in each case.
a) Keeping foreign workers out of Germany
b) Reversing the phasing out of nuclear power
c) Tax cuts
Source Allan Hall, "Schroder Poll Hopes Slump As Euro Hits German Jobs," The Times, January 17, 2002.

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