Reihan Salam on German Productivity

Germany has been held up as a model for the United States by David Leonhardt and others. Reihan Salam  correctly observes that German offshoring to Eastern Europe has been an essential part of Germany’s apparent success. He also  points out that:

The fall of communism was, as Marin suggests, a positive exogenous shock that proved a tremendous boon the German economy. A 20% increase in productivity is nothing to sneeze at, and I don’t think that David Leonhardt gave the role of offshoring its due in explaining the virtues of the German model.

Of course, the Houseman-Mandel thesis also tell us that German productivity gains, like U.S. productivity gains, might offer less than meets the eye.

Reihan raises a very interesting point which I hadn’t considered. Remember that our recent paper, “Not all productivity gains are the same. Here’s why”, we divided measured productivity growth into three types:

  • Improvements in domestic production processes
  • Gains in global supply chain efficiency
  • Productivity gains at foreign suppliers.

As we noted in the paper, these different types of productivity growth cannot be told apart in the conventional economic statistics. However, the type of productivity growth matters for domestic wages and jobs. For example,  productivity gains from improvements in domestic production processes are more likely to result in rising real wages for domestic factory workers.

We made our argument in terms of the U.S., but it potentially applies to other countries as well. I hadn’t considered Germany until Reihan raised the point, but in fact Germany appears to use a similar import price methodology as the U.S. (see for example Silver 2007) with the potential for similar problems, though I need to take a closer look to make sure.

Here’s something to think about: In a global economy, measured productivity growth in an industrialized country potentially may not measure only the strength of that country’s domestic economy, but also its ability to successfully offshore production to cheaper countries, with implications for domestic wages and jobs.


  1. “For example, productivity gains from improvements in domestic production processes are more likely to result in rising real wages for domestic factory workers.”

    Agreed. And a happy result. But with so few factory workers now in the U.S. (low percentage of the work force), how would the rising wages of these few contribute much to the rest of the economy anyway? In earlier decades (50’s, 60’s) the rising wages from the many factory workers “circled back” into the rest of the economy, elevating the wages of the butcher, the baker, and the candlestick (and buggy whip?) maker. Today, wage increases to U.S. manufacturing workers — because they are such a small percentage of the total workforce — make little difference to the wages of the majority. It’s even worse when, as Mike Mandel points out, productivity gains come from off-shoring so offer no wage increases to anyone (except the few re-structuring managers).

    A pressing question arises: How can the majority of U.S. workers today increase their productivity, and hence their real wages?

    Can computers increase the productivity (and wages) of service, information or knowledge workers to anywhere near the same degree as automation once boosted factory floor workers’ productivity? Considering the change in product quality over the decades in most fields, it’s hard to make comparisons, very hard to measure. But have doctors, lawyers, engineers, teachers, accountants, plumbers, electricians, builders, salespeople, clerks, restaurant workers, civil servants, etc., accomplished anything close to the productivity gains as automation made possible for factory workers? Using more and better prefabricated components probably doesn’t count — the factory who made the component most likely gets the credit and gain. Perhaps service jobs cannot be off-shored. But so what? If their productivity cannot be much boosted, neither will their real income likely rise. The only hope I see is for lots of “other people” in many of the country’s local communities to make more money, which will “spill over” to the rest of us, eventually elevating everyone’s real income. But what widespread productivity breakthrough in what job categories could make this possible? I’d like to know.

  2. I quite agree with the premise that Germany has seen outsized gains due to the influence of taking over East Germany. Let’s think about it. Not only did they get a new consumer crying out for stuff to purchase, but they became a steady source of low wage production as well. That’s a win-win. If you study production in Western germany, I’ll bet you’ll find dollars to donuts that actual production there shrank, and it all got transferred to East Germany and other former Communist states. Those states don’t have anywhere near the same protections for workers or the environment (and the environment in east Germany is widely regarded as one of the most polluted in the whole of Europe). So consider: how do the rest of the EU nations get in on this growth act? let’s face it, growth in every other EU nation has been stagnant or worse. Inter-EU trading from stagnant economies does nothing. They needed to generate growth. Answer: start included more and more of the smaller nations on the periphery, who have (a) untapped demand due to (b) poor citizens. This explains the entire EU expansion policy for the last 10-20 years. However, in order to do that, the EU also had to lend those poorer countries the money to jump-start their economies and get their people consuming. Many countries have done a good job in this regard; but many have not, its been done ona faulty premise or the loans made have been particularly poor. And now the reckoning is coming home. Those countries who messed up (grew too fast, had massive corruption) are now in danger of never paying those loans back. See Ireland, Greece, Portugal. Now in some cases those from the newly expanded nations didn’t waste their time at home, and instead went for the immediate improvement by taking advantage of the open movement of workers. So many ended up in Britain and the like. That helped them to grow too – much larger immigration than would have been seen. The problem now comes when they’ve all returned home.

    So if you want growth, there are 2 ways to get it. One is vastly expand immigration. It’s proven to work, time and again. Second, find some ‘third world’ economies to expand into for trading, and make sure they aren’t corrupt enough to sink your investment or have other ways of hiding any problems. See, Communist China or other such nations (Cuba will be next). The multinationals assumed all their investments in China would mean the Chinese would buy American-made (funded) products, but failed to realize the extent to which the government didn’t let that happen by forcing investment in government-owned businesses, who also then stole the IP. They are making their own copies for their own consumption now.

    EU cannot expand any further. It’s got to resolve the issues with the screwups they already have, adding new ones can’t paper over the mistakes already made. US has lots of opportunities to open the borders and bring in those from Central and South America (including Mexico) but won’t do it. If Japan have any sense, they’ll open the borders to allow workers to come in help reconstruction after the earthquake/tsunami (China, Indonesia etc.).

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