23 April 1998 - 25 April 1998

Solutions to Unemployment in the Age of Globalisation

Chair: Professor Dr Otto Schlecht

Joint conference with the Herbert Quandt Foundation

Ditchley’s second visit to Germany, enjoying the efficient collaboration and splendid hospitality of the Herbert Quandt Foundation in the impressive setting of the Petersberg across the river from Bonn, tackled the complex subject of how unemployment might be kept at tolerable levels in the developed Western economies amid the changing pressures of economic globalisation.

Globalisation, we recognised, was often seen by domestic politicians as threat rather than opportunity, with wider competition through more integrated markets and factors such as the entry into the world economic system of China, adding about 20 per cent to the potential labour force.  Asian countries, in particular, seemed increasingly capable of doing work once thought of as a Western preserve at labour-cost rates far below Western levels;  and high-cost low-skill Western jobs therefore seemed doomed, at least in externally-tradeable fields.  But we were healthily reminded that protectionism actually damages productivity;  and that countries like Germany still enjoyed superior assets in human capital and in the ability to invest further in it.  Efficiently managed, these remained massive advantages, and the global opening of markets widened the scope for exploiting them;  despair about Western employment levels was accordingly out of place.  But what did effective exploitation of the advantages entail?  It was vigorously argued that productivity growth must be enabled to outstrip real wage growth, not vice versa as too often in Europe’s recent past.

Our discussions laid heavy  emphasis on the importance of high-quality human capital, and therefore on the education system at all levels.  Even where global economic circumstances might benefit countries as a whole, unskilled workers were often large-scale losers;  and if - as we all agreed - this was socially and morally unacceptable as an adjustment mechanism, the education system must be resolutely focused upon improving effective employability.  The demands of that were steadily rising, especially in practical competences like teamworking and communication - and language skills - rather than the mere accumulation of information (though we were warned against an over-facile abandonment of the basic tools of learning and understanding).

None of us was disposed to profess general satisfaction with current education systems in this light.  There were areas of encouraging quality - the primary-school level in Germany, suggested one voice;  the better universities in the United States, said another - and we all acknowledged anyway that the increasing compulsion towards life-long learning placed heavier responsibility upon settings, like that of employer companies, other than the traditional components of the educational structure.  (Might individual or company initiative in this respect be fostered cost-effectively by more favourable tax régimes as in Canada, we wondered?)  But we doubted whether, in the round, the traditional components themselves were yet sufficiently geared to the “employability” goal, to the scope for innovation (including but not only in technological instruments) in respect of methods and subject coverage, and to the need for objective evaluation of outcomes.  We noted a particular plaint that in Germany the Hauptschulen, the key providers of feedstock for the apprenticeship system, had actually lost ground, with many young people now failing the tests for entry to the system.

Universities, especially in Europe, attracted spirited comment.  It was strongly urged that though they had made some advances in flexibility and responsiveness, much more was needed.  A stronger infusion of real competition - in teaching as well as in research - ought to break away from central top-down allocation of resources and should incentivise or compel change, with higher priority given to relevance to society’s needs - including particularly employability - shaped in closer dialogue with employers.  In Germany for example, so one participant suggested, the ethos of the typical professor still approximated too closely to that of the lifelong tenured official, with weak links between real performance and reward.

The German apprenticeship system, as often before, attracted much commendation from elsewhere;  sharp contrast was drawn with British conditions in which 45 per cent of young people left education with no real qualifications.  The feature of the system whereby participants made, in effect, a material contribution of their own by accepting low remuneration and reduced free time was noted approvingly.  It nevertheless needed also support from employers based not on perception of direct commercial advantage - this was not dependably provable - but on a value-based sense of obligation;  and this might not be easily created in other countries.

All that said, reservations were voiced about whether the system’s content was always of sufficiently up-to-date relevance.  It was essentially related to manufacturing industry, which now provided only a quarter of German employment;  if jobs for the system’s output ceased to be available, confidence in it might fade.  This prompted comment that for all their excellence in manufacturing, German standards in non-tradeable domestic services still left much room for improvement, especially in the new Länder.  It was not clear whether apprenticeship could be shaped to foster this - further deregulation might be a more powerful instrument.

The impact of technical change on employment formed a major part of our discussions.  Such change both created and destroyed jobs;  but though in a well-functioning economy the creation should in the long run exceed the destruction, the nearer-term mismatch between them in time, place and sector could generate severe social and political strains.  The strategy must nevertheless be to not to resist adaptation but to improve it - to heighten incentives and capacity to innovate in product, process and (not least) organisation, with time-to-market a key dimension.  Cost-cutting or benchmarking - a concept for catching-up, not for leading - could not alone sustain competitiveness.

What contribution should governments make to innovation?  Not, in general, to attempt to conduct it themselves - understanding of risk in interaction with technological change was not their natural forte.  But governments had considerable scope and responsibility for providing conditions in which innovation could flourish - especially, as a vigorous intervention urged, in the more sympathetic fostering of entrepreneurial small and medium businesses, usually the prime source of responsive innovation.  In addition, so several participants argued, governments had a special part to play in the research field - the R of R & D.  Concern was expressed about declining public allocations to this, both in Europe and (with the reduction of defence spending) in the United States.  The education system too had key innovation-related roles, both in providing labour forces of a quality able to help with innovative effort and in marrying its intellectual resources - notably those of the universities - to the working of business;  there was much room for two-way initiative to improve dialogue and feedback between market and science.  It was not to be expected that such dialogue would yield dependable prediction - in innovation constant surprise was inescapable, and not every attractive-looking idea found a market outlet;  but better understanding among all players was a key element in adaptability and in swift action to seize opportunity.

Vigorous exchange developed around the marked current difference between the Anglo-Saxon and the Continental European countries in strategies and outcomes in unemployment (though one comment challenged the customary perception of sharp disparity between United States and other levels - was the gap really so wide when allowance was made for factors like numbers in prison?)  There was a dark side - perhaps most evident in inner cities - to the low levels achieved (often partnering low wages in jobs arguably of doubtful quality for which holders might indeed be over-qualified) in the US and the UK;  most Continental participants held strongly that social consequences of such kinds would rule imitative measures utterly out of consideration in their countries.  Nevertheless, it was noteworthy that the real disparity in levels related in the main to a particular category, the long-term employed;  and this must reflect the fact that social-security systems in Europe now contained relatively weak economic pressures to return to work (though recent changes in Britain were tackling this energetically, with stronger conditionality attached to the receipt of benefits).

Political and social consensus was an important theme.  Continental governments - and Canada - placed very high value on sustaining this;  one observation noted that it could often make it easier to take tough economic decisions (though it could not remove the need for them).  Misgiving surfaced however on whether the shaping of consensus centrally among “social partners” in corporatist style might leave concern for the unrepresented unemployed rated too low;  and there seemed much to be said for a better balance between central and local decision, with more freedom at the company level to choose strategies related to the realities of particular business situations.

We talked a good deal about wage freedoms and about standard hours of work, without reaching neat conclusions.  Centrally-determined rigidity in wages, we heard, had imposed severe unemployment on the new Länder;  wider dispersion of wage rates would arguably be all the more necessary as monetary union in Europe reduced the range of other adjustment mechanisms available;  flexibility generated a greater stimulus to individual self-improvement through education and training, and moreover gave the unskilled a better chance of jobs.  (Even this last proposition did not command complete consensus, perhaps reflecting in part our failure to agree whether there really was in modern economies a substantial and irreducible pool of individuals who would always be found, for one reason or another, unable to hold a skilled job.)  As regards hours of work, some participants argued that central-government-set reductions smacked of the lump-of-labour fallacy;  others replied that in France, for example, the reduction to 35 hours was a guideline, not an imposed rule, and that redistribution of the quantum of work was an entirely legitimate approach provided that unit labour costs were not increased;  too unreal a proviso, replied the first school.

Calls for greater deregulation were a recurring theme, alongside some urging that the European Union should not damage labour-market flexibility by insisting on “one-size-fits-all” uniformity in matters such as labour taxes and pension standards;  on this latter view, cultural anchors and linguistic barriers provided adequate defence, even given the principle of free movement, against an uncontrolled migratory surge to the regions with the most generous social-security régimes.

Social policies, we all agreed readily enough, must be economically numerate (as they had not always been hitherto).  In Germany the rate of increase in labour-productivity increase had slowed, and social provision still predicated upon high growth and low unemployment risked pushing average labour costs up faster.  The “equilibrium” rate of unemployment was now around 10 per cent, and reducing it would need institutional change to create significantly different incentives in the labour market - for example by making passivity in long-term unemployment less comfortable, or shifting the balance of social-security burdens away from firms (thus encouraging jobs) and towards individuals, so that they carried more cost and risk for themselves.  The prospect however that any such change would inescapably yield numerous losers, at least in the short term, made the problem politically intractable.

There was much that time-constraint prevented us from addressing sufficiently.  We realised, for example, that most of our discussion had not adequately reflected the importance of differences as between age segments of the labour force;  we had not considered the case for wider or altered involvement of “third-age” individuals, or for tackling unemployment among the young - who in some of our countries had suffered its impact disproportionately - by reducing initial remuneration.  We scarcely touched upon the impact of demographic change, save in one intervention that drew salutary attention to the choices opened up - improve the system, or deploy the money elsewhere? - by the fact that declining numbers entering the education system ought gradually to make its maintenance at current levels less costly.  We could not fully explore - though we noted cost problems - particular ideas like the possibility of using public funds to top up low wages so as to keep people out of severe poverty without impairing wage flexibility in the labour market.

We noted the continuing importance to employment of factors lying outside the customary ambit of labour-market policies, like the provision of fertile investment conditions through a dependable legal environment and good physical infrastructure.  Within the labour market itself, however, most of us were minded to accept the case for active policies to supplement the “hidden hand” in tackling unemployment;  and it was evident that there was much scope for sharing and debating ideas for such policies across national boundaries.

This report reflects the Director’s personal impressions of the conference. No participant is in any way committed to its content or expression.

Chairman: Professor Dr Otto Schlecht
State Secretary, Federal Ministry of Economics, 1973‑91


Mr Lorenz Fritz Dipl.-Kfm
Secretary General, Federation of Austrian Industry

Mr Mel Cappe
Deputy Minister, Human Resources Development Canada and Deputy Minister of Labour
Mr David Lindsay
President and CEO, Ontario Jobs and Investment Board

M Jean-Michel Charpin
Commissioner of Planning
Prof Elie Cohen
Member, Economic Advisory Staff of the Prime Minister

Dr Hans Barbier
Head, Economics Desk, Frankfurter Allgemeine Zeitung
Mr Uwe Berner
Member, Board of Management and Industrial Relations Manager, ZF Friedrichshafen AG
Dr Wolfgang Dowie
Commercial Managing Director and Personnel Director, Bosch-Siemens-Hausgeräte GmbH
Mr Florian Gerster MdL
Minister of Labour, Social Affairs and Health, Rhineland-Palatinate
Mr Reinhard Grasse
Member of the Executive Board, Human Resources and Culture Change, Siemens-Nixdorf-Informationssysteme AG
Dr Günter Joetze
President, Federal Academy of Security Policy
Dr Gerhard Kühlewind
Head of Research, Institute for Employment Research, Federal Employment Services
Dr Herwig Letz
Head, Central Human Resources Management and Social Affairs, BMW AG
Mrs Ulrike Mascher MdB
Chairperson, Committee for Labour and Social Affairs, SPD group in the Deutscher Bundestag
Mr Klaus Methfessel
Associate Editor and Head, Economics and Politics Desk, Wirtschaftswoche
Mr Johannes Neukirchen
General Delegate of the Management Board for Federal and European Affairs, BMW AG
Prof Dr Birger Priddat
Dean, Faculty of Economic Scient, Universität Wittan-Herdecke
Mrs Waltraud Reichardt
Owner, Reichardt-Verpackungstechnik
HE Baron Hermann von Richthofen
Permanent Representative of the Federal Republic of Germany to the North Atlantic Council
Dr Kai M Schellhorn                                           
Member of the Board, Herbert Quandt Stiftung
Prof Dr Dagmar Schimpanski
Professor of Solid State Electronics, Technische Universität Ilmenau
Dr Kajo Schommer
Minister of Economics and Labour, Free State of Saxony
Prof Dr Horst Siebert
President, Global Economy Institute, Kiel and Holder, Chair of Theoretical Economics
Dr Eva-Maria Stange
Chairperson, Education and Science Union
Prof Dr Hans-Jürgen Warnecke
President, Fraunhofer Society for the Advancement of Applied Research
Prof Dr C Christian von Weizsäcker
Professor of Economics and Director, Energy Supply Institute, University of Cologne
Prof Dr Horst Wildemann
Director, Production Logistics and Technology Management, TCW Transfer-Centrum GmbH

Mr Willy Wagenmans
Adviser on International Affairs, Netherlands Trade Union Confederation

Sir Nigel Broomfield KCMG
Ambassador to the Federal Republic of Germany 1993-97;  a Governor and Director-designate, The Ditchley Foundation
Mr Stephen Byers MP
Minister of State, Department for Education and Employment
Lord Gillmore of Thamesfield GCMG
Senior Adviser to the Chairman, Barclays de Zoete Wedd Limited;  Chairman, The Ditchley Foundation
Mr David Goodhart
Founder and Editor, Prospect magazine;  Bonn Correspondent, The Financial Times, 1988-91
Mr Brian J G Hilton CB
Director General, Corporate and Consumer Affairs, Department of Trade and Industry
Prof John Kay FBA
Peter Moores Director, Said Business School, University of Oxford
Sir John Kingman FRS
Vice-Chancellor, University of Bristol
Prof Richard Layard
Professor of Economics and Director, Centre for Economic Performance, London School of Economics and Political Science
HE Sir Paul Lever KCMG
Ambassador to the Federal Republic of Germany
Mr David Marsh
Director and Head of Research - UK and Europe, Robert Flemming & Company Limited
Sir Michael Quinlan GCB
Director, The Ditchley Foundation
Mrs Heather Weeks
Deputy Director, The Ditchley Foundation
Mr David Willetts MP
Opposition Frontbench Spokesman on Employment

Mr Neil Elliot Bomberg
National Association of Counties, Washington DC
Dr Marvin H Kosters
Resident Scholar and Director, Economic Policy Studies, American Enterprise Institute for Public Policy Research
Dr Ann Markusen
Professor of Urban Planning and Policy Development and Director, Project on Regional and Industrial Economics, Rutgers University
Dr Van Doorn Ooms
Senior Vice President and Director of Research, Committee for Economic Development, Washington DC
Dr Roger Pearson
Executive Director, Council for Social and Economic Studies, Washington DC
Mr Willard A Workman
Vice President, International Policy, US Chamber of Commerce