CNBC Magazine, 1 June, 2011
With its low fertility rates and years of rigid immigration rules, Germany is facing a looming skills shortage.
If your Berlin taxi makes a worrying sound and your driver is Russian, you can relax – there is a good chance he has an engineering degree. Ditto if someone starts choking in a Munich restaurant and there is an Iranian waiter at hand – chances are he has had medical training. Germany has long failed to recognise the qualifications of many of its skilled migrants, while also shunning the huge source of labour on its eastern borders. This could now prove costly as the country contemplates a looming skills shortage.
A shrinking population, barriers to female participation in the workforce and an outmoded immigration system have all contributed to the problem. It is a crisis that industry experts have been warning about for some time and one that the government is now finally taking tentative measures to address.
For the moment at least, Germany is roaring ahead, in contrast with other European economies that are struggling with mounting debts and soaring unemployment. After years of lagging behind, Berlin expects 2.6% growth this year and employment is at its highest in two decades. But the reality is that Germany is fast becoming the old man of Europe. The latest statistics by Eurostat show that the country’s birth rate was just 1.36 babies per woman. The only EU countries with lower fertility rates were Hungary, Poland and Lithuania.
In comparison, Irish women are having an average of 2.07 babies and France is second best at a rate of exactly two, just right to replace the population. It’s likely that Germany’s demographic implosion will be dramatic. Over the next 50 years, the population is expected to shrink by 17 million from the current 82 million.
Last year McKinsey reported that by 2015 the labour crunch would already be in full swing, with more jobs being offered than can be filled. By 2020 there could be a shortfall of 2 million workers. And in the absence of a targeted immigration system to make up the numbers, there won’t be enough people coming onto the labour market to meet the economy’s needs. With a rapidly ageing population, the question may be asked: “Who is going to do the work to keep Germany prosperous?”
Many sectors of the economy claim that this skills deficit has already arrived. The German Chamber of Commerce (DIHK) calculates that around 400,000 positions are currently unfilled across the economy. “Companies tell us that they have one, two, maybe even three or four job openings and they simply cannot fill them,” says Stefan Hardege, head of DIHK’s labour market unit. “When things are going well and orders are coming in, sometimes they have to turn them down.” The DIHK calculates this is costing the economy around $36bn (€25bn) a year.
Particularly hard hit is the booming IT sector, which saw 28,000 positions unfilled at the beginning of the year. According to BITKOM, the IT and telecoms industry association, 59% of members said staff shortages had hindered their business in the first quarter of 2011. Another sector facing shortages is healthcare, where around 50,000 workers are required. Engineers are also in short supply. Lars Funk of the Association of German Engineers (VDI) says this has been a problem for years, even during the downturn. In March, there were 87,000 jobs openings in engineering and only 23,000 unemployed engineers, many only temporarily between jobs. Funk cites a report by the German Institute for Economic Research that put the cost to the economy in 2010 at $5bn.
Fabian Lindner of the Hans Böckler Foundation, a research body affiliated to the Confederation of German Trade Unions, disputes this. The economist argues that in fact other workers most likely made up for any shortfall. Linder believes employers are simply complaining because they now have to actively seek qualified workers rather than having the pick of the bunch. “Now the employees hold the better cards,” he says.
Industry representatives, however, say there is a dearth of suitable applicants as the education system is simply not producing enough young people with the necessary qualifications and skills. “The number of graduates coming out of universities just about replaces the number of engineers retiring,” Funk says. “Technological advances in German industry mean there is a constant need for highly qualified people.” Recent efforts to encourage more young people to study engineering have started to bear fruit but it is not enough to facilitate significant growth in the sector.
“The education system isn’t providing people with the right skills,” agrees Michael Stahl, chief economist with Gesamtmetall, the association representing the metal and electrical industry. The core problem, he argues, is that so-called MINT fields (maths, informatics, natural sciences and technology) have been neglected for two decades. “At school, you can choose to do French or philosophy, instead of maths, physics or biology. Too few people are then going on to university who enjoyed these kinds of subjects in school and want to study them.”
Stahl points out that a quarter of all MINT graduates work in the metal and electrical sectors, so any drop in the student numbers hits these companies very hard. “In Germany we also have a big problem that 20% of school leavers are too poorly educated to undergo modern training programmes,” he adds. “This is a weakness in the German education system. A lot of potential is going to waste.” Most German states have a three-tiered system in which the brightest kids are streamed into high schools that prepare for university, while the rest go to vocational schools.
“Many young people are leaving school and their level of maths, reading and writing is only at the level of elementary school,” says DIHK’s Hardege. “There needs to be better careers advice about what the labour market expects.” Gerda Holz, a researcher at the Institute for Social Work and Social Education in Frankfurt, says that companies also have to rethink their expectations of youngsters. “Industry has to ask itself what it can contribute to the success of young people, rather than simply expecting them to be delivered by the school system already perfect.”
Another huge potential source of under-utilised labour is women. It can often be very difficult for women to combine successful careers and families in Germany. Hardege says childcare provision has to be improved and made more flexible “so that qualified women can quickly re-enter the job market”. Many of the sectors that are currently seeing a shortfall have been traditionally shunned by women. Only 11% of engineers, for example, are female.
Holz points out that with girls now doing better than boys in school, these sectors should be looking to recruit more women, particularly by making their workplaces more female-friendly. Yet the demographics mean that even if Germany makes improvements to the education system and addresses the gender imbalances, it is still unlikely to fill these gaps with just its own population in the long term. Therefore it must resort to foreign manpower.
Germany is already sitting on a source of untapped foreign labour. It is estimated that up to 300,000 foreigners living in Germany working cannot work at the jobs they were originally trained for because their qualifications are not recognised. The government has now drafted a law to improve the evaluation system for foreign credentials. Education minister Annette Schavan admitted: “We are competing worldwide for the best brains, so we have to optimise the potential of everyone who lives here.” It is hoped the new legislation will also attract workers from abroad. Currently a non-EU citizen attempting to get a work permit in Germany faces a daunting task, with a litany of red tape.
Hardege says the “time-consuming and bureaucratically laborious” system puts off many applicants. He recommends fast-tracking applications for those areas where shortages exist, as well as reducing the minimum pay a foreign highly- qualified worker has to earn from the current level of €66,000 to €40,000.
“These are all short-term measures but we also have to think about how we are going to deal with this in the medium to long term,” he insists. The DIHK and many employers’ associations would like to see a points system, like those used in Canada and Australia, where immigrants are selected on the basis of how their skills match gaps in the labour market.
Yet politicians in Germany seem to baulk at this prospect. In particular the Christian Social Union, the Bavarian sister party to Chancellor Angela Merkel’s Christian Democrats, is loath to see an influx of non-European foreigners. Instead, Germany seems to be banking on availing of the high unemployment levels elsewhere within the EU. It is already encouraging workers from Portugal and Spain to come and work in Germany. As of 1 May, the country’s restrictions on workers from the newer EU states were lifted, in theory opening up an even bigger pool of labour. Some obsevers predict that up to 500,000 people could arrive from neighbouring Poland.
While BNP Paribas SA is predicting an exodus of as many as half a million Polish workers across the border by 2015, many of these are likely to be taking unqualified low-skilled positions. After all, most highly skilled workers left for Ireland and the UK back in 2004. Christoph Schmidt, a member of a group of economists who advise the government, has said that he expects 100,000 workers at most to arrive from Eastern Europe each year. “That won’t be enough to cover our need for labour. It’s not as if we just have to open the gates and then the specialists will come.”
Originally published in CNBC Business Magazine (June 2011 issue):