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The Economist published an opinion piece today titled, “Prudence is the new greed“. The author notes:
THE new economic villains are not greedy bankers or inept politicians, but businesses choosing to hoard cash rather than hire new workers. I’ve heard it suggested that this is greedy or even unpatriotic.
But businesses have good reason to hold cash right now. Investment is risky and demand is still weak. An ongoing tepid recovery, or even a double-dip recession, may mean firms won’t need to grow for a long time. Or things might get worse; in that case a business owner may worry he won’t generate enough cash flow to meet his payroll. Then he’ll need that cash to avoid more layoffs. It might just be a sensible idea to hold off on expansion and keep assets as liquid as possible until there is some end to trouble in sight.
There’s a lengthy discussion about German firms and the inflexibility of the German labor market.
Joe Nocera is not having it. He confuses risk aversion under uncertainty with a focus on short-term profits.
The only way that’s going to happen, however, is if our society implicitly makes the kind of compact that German society makes explicitly: We have to be willing to allow companies to sacrifice short-term profits for the long-term good of the country. As the leadership expert Michael Useem wrote recently on The Washington Post’s Web site, business needs to make “people a priority, not just earnings.”
I never thought I’d see the day Americans envy the German labour market. But in Germany, firms often opt to cut back on hours rather than lay off workers, while the government subsidises the workers’ lost earnings.
As we suffer through our own economic hard times, the German approach is something we can only envy. Here, companies quickly lay off workers, many of whom never find their way back into the full-time labor force. Corporations shy away from investing for the future, even though investment is what will turn the economy around. The government, for its part, invariably starts talking about “job creation,” but rarely does anything that makes a difference.
But one reason German firms are keen to cut back on hours rather than sack employees is that it’s very hard and expensive to fire anyone in Germany. It’s so hard to fire someone that firms became reluctant to hire in the first place. That is why Germany has historically had much higher rates of structural unemployment. Many people who lose their jobs never find work again—and that’s in good economic times.
Having worked for a German company for 2.5 years, I saw first hand the inflexibility of the German labor market. Once I had someone on my budget, it was nearly impossible to get of them–even if they were incompetent or worse, malfeasant. After many discussions with my German colleagues, it was clear that this was accepted social policy and the resultant double-digit structural unemployment was part of the deal. Germany’s export driven economy has powered through the latest global recession, so I guess an inflexible labor market is sustainable as long as a) you build good products b) you can command a premium and c) people continue to buy your goods. Thoughts?
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