Heiner Flassbeck – The market economy, fair wages, and poverty in rich Germany

Germany has a balanced budget, a massive current account surplus, and low unemployment. Why then is there so much poverty in such a wealthy nation?

Heiner Flassbeck is an economist, as well as publisher and editor of “Makroskop” and “flassbeck economics international

Originally posted in German at Makroskop

Translated and edited by BRAVE NEW EUROPE


Food banks are currently a popular topic in Germany. Hardly anyone asks, however, why there are so many people in a rich nation like Germany who depend on them. Poverty in Germany is ignored because people firmly believe that a high rate of employment can only be achieved if there are extremely low social benefits.

Recently Germany’s president, Frank-Walter Steinmeier, paid an official visit to the Saarland and commented on the dispute raging in Germany concerning food banks (“Tafeln”), which began in Essen with the exclusion of foreigners, and has spread throughout the country. According to the daily Saarbrücker Zeitung of March 7th, the Steinmeier said:

“Politicians must ensure that there is no competition between those in need, which expresses itself in aggressive terms.”

Using volunteers, the food banks distribute food that is no longer needed elsewhere and would be thrown away. It is distributed free of charge to the so-called needy throughout Germany. These are above all old people and the recipients of the notorious Hartz IV benefits, i.e. those who must be directly supported by society because they cannot find work.

Why is that so? Why, in an undeniably wealthy society like Germany’s, is it not possible to make enough money available for all people so that they are not dependent on such alms and help from volunteers? Why didn’t the federal president just say: “Politicians must ensure that there is no need”? What prevents us from making society fairer in this respect? What is to prevent us from giving enough support to all those who – for whatever reason – are not in a position to feed themselves reasonably and healthily on a low wage income or a state pension, so that they don’t  have to join the queue at a food bank?

The Saarbrücker Zeitung gave an answer to this question in an op-ed in the same issue. The author wrote that the desire for higher social benefits was understandable. However, a certain gap between those employed and those unemployed must still exist.

“A significant increase in basic income support would mean that employees with low incomes would hardly have more to live on than those who receive state support.”

Whether this is really socially just, everyone has to decide for themselves. However, it would clearly violate the principle of wages being always in line with the performance of the worker.

What is work performance?

What exactly does that principle mean? It is meant to say that those who do not actively work for a wage cannot get as much as those who work. But many of those who receive Hartz IV would probably like to work but cannot find a job. Is that their fault? They are willing to work, but society does not need their services. Do we have to punish them for this or should we not give them exactly as much as those who work, at least if they turn up and offer their labour at the Federal Employment Agency punctually every Monday morning?

However, the wage gap rule raises another question. Why do we not simply give higher wages to those who work for the lowest wages today, and then the unemployed could also get more without us having to solve the problem of the wage gap and so-called performance equity? The answer to this question very much depends on economic theory.

The neo-classical or neo-liberal economists’ response to such a wage demand is that one cannot simply increase the wages of a certain occupational group, because companies would simply seek cheaper alternatives in the labour market and exactly those occupational groups would then find it much more difficult to get a job. This theory assumes that every person has a typical individual level of productivity, which is called their “marginal productivity” by economists. This means that because of their qualifications they can only produce a certain value-added product quantity when a company hires them. If their wage exceeds the value-added of this product quantity, they can no longer find a job because their wage costs mean a loss for the company.

Is there individual productivity?

However, the question arises as to whether this individual productivity really exists or is merely a theoretical fiction of this particular economic theory. What about those employees who do not have the chance to become more productive over time because the possibility of increasing their prodectivity with the use of additional machines is limited? Just think of nursing staff in hospitals or teachers in schools. Can they never receive a higher salary because their productivity doesn’t increase? If that were the case, who would want to become a nurse or a teacher?

Just raise wages?

In light of these considerations, obviously things are not so simple. It is not right to say that precisely when the wage of those who earn the least increases that they are too expensive and a company would promptly fire these employees. The consequence would be that the production process would completely break down. Perhaps one could simply increase the price of the products in order to compensate for the increased labour costs. If all companies did this, prices would rise slightly, but the lowest incomes would still have more purchasing power, because the companies’ costs will not increase as much as the wages of the lowest earners. Then the living conditions of these employees will improve and the level of their incomes will no longer stand in the way of an increase in rates for the unemployed.

However, the state can also ensure directly that the lower income groups, after taxes have been deducted, are in a much better position than before, by reducing their taxes and social security contributions and to provide more support for their children. If the government did that, it could also significantly increase the rates for Hartz IV without even having to discuss wage gaps. Sooner or later food banks would be completely unnecessary. Poverty in a rich country could thus be avoided.

Why not redistribute wealth?

But even this kind of redistribution of income is rejected by the majority of politicians. Here, too, one has the impression that they believe the redistribution in favour of the rich in the past was justified. But it was not, which is why, as I have argued several times before, the term “returning wealth” is much more appropriate than the term redistribution. Returning wealth is essential to reducing inequality, but also for economic reasons. Only by returning wealth will it be possible to remedy Germany’s imbalance, which is skewed in favour of exports at the expense of the internal market.

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