Consensus in the German labour market - Economic consequences and the implications for reform

Characteristic successes of Germany's social market economy include both stability and productivity growth, yet mass unemployment indicates the need for reform. The conventional reform agenda emphasises Germany's restrictive labour market. However, many targets for reform are elements of an institutional system in the labour market that promotes Germany's culture of consensus. A model is outlined that synthesises insights from X-efficiency and business strategy theory to highlight the positive effects of consensus on business performance. The model together with accompanying empirical data suggests that Germany's consensus culture not only gives rise to negative outcomes associated with labour market inflexibility - in particular, sluggish employment growth - but also helps firms to generate innovation, productivity growth and sustainable competitive advantage. This implies the need for a renewed "social contract", in which consensus not only generates productivity growth but also sustains a corporatist bias towards employment. Finally, a corporatist reform process consistent with Germany's cultural and institutional environment is likely to be more effective than top-down liberalisation in accelerating job creation while maintaining cultural sources of global competitiveness.