Rich Germany Has a Poverty Problem

Inequality and underemployment are on the rise in Europe’s economic powerhouse.


BERLIN — The signs of Germany’s economic might are hard to miss. There are the swanky new high-rise hotels cropping up on Berlin’s main shopping mile and luxury condominium complexes spreading across the government quarter. In the southwest, Germany’s engineering heartland, auto parts factories are humming and newfound confidence is brimming.

In a little over a decade, the country has transformed from Europe’s “sick man,” as the Economist once famously called it, to the continent’s economic engine. The export industry is already the second largest in the world and outperformed expectations in February, bolstered by a weak euro. Notoriously tightfisted Germans are starting to open their wallets — consumer confidence has hit a 13-year high. Greece and Italy are struggling under the weight of their debt burdens, but Europe’s wunderkind notched a record current account surplus in February.

That economic prowess has brought power and popularity on the global stage. Berlin has taken on key mediating roles in crises in Ukraine and Syria and is lobbying for a permanent spot on the U.N. Security Council. Meanwhile, Germany has become the second most popular destination for immigrants in the world, after the United States. As Germany’s stock has risen abroad, new self-confidence has taken root at home. For most here, it is good to be German.

Yet in quiet corners of the capital, a different Germany is also growing.

At a local welfare center in Berlin’s Tempelhof neighborhood, Christine Schmelzle struggled to maneuver her stroller through the door. Her 2-month-old baby was asleep. The line of welfare recipients registering at the information desk barely edged along. A steady stream of people came and went.

The 25-year-old single mom is a hairdresser, a famously underpaid profession here. Even before giving birth to her son, she barely made ends meet working full time. Now she’s receiving welfare and trying to figure out how to stretch her meager income even further. She’s considering registering as self-employed and picking up extra work on the weekends. How she’ll juggle that with motherhood is unclear.

“It’s tough, really tough. You really have to really slog to get by as a hairdresser, and alone with a child it’s pretty near impossible,” she said, rocking the stroller as her baby shifted restlessly in his sleep.

Schmelzle is on the losing end of what is an increasingly bitter paradox in Germany. Unemployment is sinking, the country is booming, but poverty and inequality are on the rise. That has fueled a growing debate over the merits of the country’s economic success.

In February, the Berlin-based Paritätische Gesamtverband, a leading welfare association, reported that poverty is at its highest level in Germany since reunification 25 years ago. Some 12.5 million of Germany’s 80 million are now classified as poor; they earn less than 60 percent of the median household income (for a single household, about 900 euros a month).

Seniors and single parents are the most likely to slip through the cracks. But an especially troubling trend, say the study’s authors, is the growth in the number of working poor. According to the Federal Statistical Office, a little over 3 million German workers now fall below the poverty line. The Paritätische says the increase stems from years of chipping away at important labor protections.

“More and more people have a job, but ever fewer can actually live from it,” said Christian Woltering, who co-authored the study. “We believe there’s a significant correlation to a development we call the Americanization of the labor market.”

The roots of that trend go back more than a decade. If asked why their country has withstood the economic crisis that has plagued much of Europe, most Germans will point to Agenda 2010, a package of reforms former Chancellor Gerhard Schröder enacted in 2003 to tackle stubbornly high unemployment and jump-start the economy.

Agenda 2010 introduced a new class of flexible, part-time employment. Any job is better than no job, was the idea. The legislation largely deregulated temporary work, freeing up employers to hire and fire part-time workers by putting them on more equal footing with full-time workers. It also ushered in the mini-job, a form of part-time employment that pays 450 euros a month tax-free.

The linchpin of Schröder’s reforms was called Hartz IV, which pulled together various public benefits into one streamlined unemployment program and limited welfare payments. Those out of a job for more than 18 months — later reduced to 12 months, with exceptions for older workers — were rolled over into the general welfare program, which pays out a basic living standard — now 399 euros a month — and living allowances. Employment agencies were tasked with making the job search the top priority; they would help but also prod welfare recipients to find a job, increasing the pressure to accept temporary or part-time employment offers.

The idea behind Agenda 2010 was to give the unemployed and poor a chance to work, paving a path toward steady full-time employment. The reality, say many economists and labor unions, looks very different.

The temporary work sector has boomed. Germany’s Federal Employment Agency says the number of temporary jobs has doubled over the past 10 years. The agency notes that half of the temporary work contracts end after less than three months, and the wages earned are well below what full-time employees earn in the same companies. Mini-jobs, meanwhile, have turned into multi-jobs. Workers often string together various part-time positions to make ends meet. Labor statistics show the number of workers who registered a mini-job as an extra source of income exploded by 120 percent between 2003 and 2012.

“The majority of part-time workers, especially mini-job holders, would like to work more and earn more; that indicates a hidden underemployment,” said DIW, a leading economic think tank in Berlin, in a 2012 study. The result is a growing underclass of German workers increasingly trapped in a low-wage cycle with very little chance to advance.

“The low-paid, low-skilled workers are finding it increasingly difficult to move up the ladder,” said Werner Eichhorst, director of European labor policy at the Institute for the Study of Labor in Bonn. “Only if you do that job for a very short period time and you are young and very skilled, you can move up easily. Otherwise you are at risk of getting stuck.”

That lack of mobility means inequality is increasing. A 2013 study by the Macroeconomic Policy Institute in Düsseldorf reported that the Gini coefficient, a measure often used to rate income inequality, rose by nearly 13 percent from 1991 to 2010.

Martin Ehlert of the Berlin Social Science Center says the shift away from low-skilled manufacturing jobs in Germany’s industrial zones was long buffered by the government’s more-generous welfare system. But the labor reforms have changed that. Now, he said, “wealth mainly goes to people with a good education and access to the labor markets. And for people with little access this never really gets to them.”

Ehlert notes that poverty and inequality in Germany are relative. The middle class here has remained stable, labor rights have remained strong for the core workforce, and the welfare system is still generous by international standards. Single households receive an unemployment allowance of 399 euros, rent and heating subsidies, and, of course, unlimited access to the statutory health insurance system.

But the growing chasm between rich and poor, and the lack of economic mobility, undercuts what many Germans hold dear. The vaunted Prussian work ethic goes hand in hand with the idea of fairness: Hard work earns you a salary and a chance to lead a decent life. If the urgent appeals and warnings ring true, Germany is turning into a country of haves and have-nots.

Heike Wagner says she has witnessed the shift in Germany’s soziale marktwirtschaft, or social market economy, over the past 10 years. The 44-year-old has tried various jobs, from teaching to working for an online language portal. But when they didn’t pan out, she turned to the state for help. She has been receiving welfare for several years now — she declined to say how many. She supplements Hartz IV by working for German services union Verdi, advising other long-term unemployed.

She has little hope for finding a steady job again in Berlin, a plight that she says has prevented her from fully participating in society. “If you don’t have any money here, it’s really hard to be part of the group. Going to a bar, to the movies, you can’t do it on Hartz IV,” she said. “If you have friends with a good job, it’s tough to keep up those friendships.”

The latest poverty studies have triggered not only some soul-searching but also a heated debate. For some Germans, the reports of rising poverty are hard to believe. A journalist for the national weekly Die Zeit accused the Paritätische of fear mongering, arguing that the “suggestion that poverty and misery are continuously growing is just plain wrong.”

The statistic used to measure poverty — 60 percent of the median household income — has also come under fire. If every German earned 100 times his or her current salary, goes the argument, the poverty rate would stay the same. Still, some in the media have raised alarm bells, urging Germans to take a closer look at a trend that has, in the glory of Germany’s recent economic success, gone unnoticed.

“The new poverty debate is a highly politicized credibility debate,” wrote a reporter for the leading national daily Süddeutsche Zeitung. “It’s between those who believe poverty is an overhyped nightmare scenario and those who live the reality every day. Germany is a rich country, but poverty is growing. You don’t see it if you don’t want to see it.”

Unions have launched campaigns to protest the 10th anniversary of the official introduction of Hartz IV. Verdi members in Berlin protested outside a welfare center last month, handing out fliers to job-seekers and urging them to organize against the government’s welfare program.

And inequality is a touchstone issue for voters and politicians. Studies conducted by the Allensbach Institute, a market research group, revealed that more than 60 percent of Germans believe inequality is growing. And in a televised debate between Chancellor Angela Merkel and challenger Peer Steinbrück before the 2013 elections, Steinbrück’s strongest jabs linked Merkel’s government to the ballooning low-wage sector, unrivaled in Europe.

The government ushered in a minimum wage at the start of the year. Until now, the country’s leaders had allowed employers and unions to set their own wages and collective bargaining deals according to the industry.

Today, a nationwide rate of 8.50 euros per hour is supposed to address low-income families’ problems, especially in fields that have been particularly deregulated. But some analysts are worried the minimum wage will lead employers to lay off workers in order to keep up with higher labor costs and avoid bureaucracy. Others have said it could lead to a boom in the underground economy, as employers simply pay employees under the table instead of raise wages.

That may be why Andrea Nahles, the Social Democrat labor minister, unveiled a new job scheme in January intended to help about 750,000 unemployed people find work. With EU funding, Nahles promised 26 new programs directed at youth, immigrants, and the long-term unemployed.

Christine Schmelzle, the hairdresser and single mom, says she hopes she will be able to cobble together a living on her own, once her child is in kindergarten. Until then, though, she sees little chance of forgoing the state’s help and the long lines at the welfare center.

“I don’t think [we Germans] are doing that well; otherwise we wouldn’t have so many unemployed,” she said, gesturing at the full room behind her. “It’s awful to stand in line here. Not being able to take care of yourself, I can’t stand it. Something has to change.”

Photo credit: Sean Gallup/Getty Images

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