Competition, Price and Wage Flexibility, and Inflation: The German Experience

• DOI: 10.1177/0003603X7201700306
• Published date: 01 September 1972
• Date: 01 September 1972
• Subject Matter: Article

COMPETITION.

PRICE

AND WAGE

FLEXIBILITY.

AND

INFLATION: THE GERMAN

EXPERIENCE

by

fuLMUT

AmmT·

Differences in economic behavior in the United States

and the German Federal Republic have led to results which

differ in

at

least two important respects.

First,

in recent

years Western Germany has experienced inflation but not

~tagflation.

Increasing prices have not,

at

least until now,

been accompanied by unemployment. Prices in May

1971,

for example, were about 6 percent higher than ayear earlier,

but the unemployed numbered only

142,900,

or 0.7 percent

of the labor force, while some

720,000

job vacancies were

registered.' Furthermore,

at

this time some

2,100,000

guest

workers from Turkey, Yugoslavia,

Italy

and other coun-

tries, amounting to nearly 10 percent of the labor force,

were employed. We can say, therefore,

that

inflation in

Western Germany has been accompanied by overemploy-

ment

rather

than unemployment. Even during the so-called

Erhard-recession, unemployment rose briefly to a peak of

only

700,000,

or 3.2 percent, arate lower than

that

achieved

•Director of

Institute

of Economics,

Free

University of Berlin.

EDITOR'S

NOTE:

An earlier version of this

paper

was presented in

August 1971

at

the Cremona Conference on Inflation

and

Unemploy-

ment. The proceedings of

that

conference have been scheduled for

publication. This article is published by permission of the editor of

the proceedings.

AUTHOR'S

NOTE:

I wish to express gratitude to my colleagues Ken-

neth J. Arrow, Norton T. Dodge, Milton Friedman, Gottfried Haber-

ler,

Hendrik

S. Houthakker,

and

Paul

A. Samuelson for their remarks

on some of the issues raised in this paper.

For

any

errors I must accept

full responsibility.

1The unemployment figures of the United States

and

the

Federal

Republic of Germany are only conditionally comparable. The Ameri-

can figures

are

based on interviews of households, the German statistics

are based on the official figures of the

Federal

Labor

Office

which gets

its information from the local labor

offices.

In

the

Federal

Republic,

furthermore, the number of vacancies is registered

and

published.

859

860

THE

ANTITRUST

BULLETIN

in the best postwar years in the United States,

yet

at

the same time more

than

one million guest workers were

employed. Second, the Erhard-recession was overcome by

increased German exports.

In

the United States, in con-

trast,

recessions have been reinforced by decreases in ex-

ports and increases in imports.

The first

part

of this

paper

will explore why Western

Germany has suffered from inflation

but

not from stagfla-

tion, and the second

part

will show why recessions have

been overcome in Western Germany by increasing exports

while in the United

States

they have been reinforced by

increasing imports.

I.

WHY

WESTERN

GERMANY

DOES

NOT

SUFFER

FROM

STAGFLATION

Microeconomic conditions in Western Germany

are

dif-

ferent in

at

least three respects: (1) a relatively high

rate

of

competition among enterprises; (2) a different kind of admin-

istered wages; and (3) a different kind of behavior by

trade

unions. We shall examine more closely each of these points

in turn.

1. The High Rate of Competition

The relatively high

rate

of competition among enterprises

in the German Federal Republic is

at

least

partly

aresult

of the European Common Market. Goods produced in other

countries can be imported without any protection and are, as

aresult, as fully competitive in the German market as

are

domestic products. The French, Italian or Dutch producers

of cars such as Citroen,

Fiat

or Daf sell their products in

Germany under the same conditions as German enterprises

such as Volkswagen, Daimler, Opel or BMW. The market

ratios in Germany for the

major

makes of cars may be found

in Table 1.