Skill-Biased Liberalization: Germany’s Transition to the Knowledge Economy

• Published date: 01 March 2022
• Author: David Hope,Niccolo Durazzi,Sebastian Diessner
• DOI: 10.1177/00323292211006563
• Date: 01 March 2022
• Subject Matter: Articles

https://doi.org/10.1177/00323292211006563

Politics & Society

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DOI: 10.1177/00323292211006563

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Article

Skill-Biased Liberalization:

Germany’s Transition to

the Knowledge Economy

Sebastian Diessner

European University Institute

Niccolo Durazzi

University of Edinburgh

David Hope

King’s College London

Abstract

This article conceptualizes the evolution of the German political economy as the

codevelopment of technological and institutional change. The notion of skill-biased

liberalization is introduced to capture this process and contrasted with the two

dominant theoretical frameworks employed in contemporary comparative political

economy scholarship—dualization and liberalization. Integrating theories from labor

economics, the article argues that the increasing centrality of high skills complementary

in production to information and communications technology has weakened the

traditional complementarity among specific skills, regulated industrial relations, and

generous social protection in core sectors. The liberalization of industrial relations

and social protection is shown in fact to be instrumental for high-end exporting firms

to concentrate wages and benefits on increasingly important high-skilled workers.

Strong evidence based on descriptive statistics, union and industry documents, and

twenty-one elite interviews is found in support of the article’s alternative perspective.

Keywords

Germany, skill-biased liberalization, varieties of capitalism, technological change,

knowledge economy

Corresponding Author:

Niccolo Durazzi, School of Social and Political Science, University of Edinburgh, 3.22 Chrystal Macmillan

Building, 15a George Square, Edinburgh EH8 9LD, UK.

Email: niccolo.durazzi@ed.ac.uk

1006563PASXXX10.1177/00323292211006563Politics & SocietyDiessner et al.

research-article2022

2022, Vol. 50(1) 117–155

The transition from Fordism to the knowledge economy has seen extensive structural

and institutional change in the advanced democracies. It has been characterized by

deindustrialization, the rise of mass systems of higher education, greater female labor

force participation, more dynamic and differentiated product markets, increasingly

global supply chains, and a weakening of unions and collective bargaining.1 The foun-

dational comparative political economy (CPE) work of varieties of capitalism (VoC)

expects “coordinated” market economies to adjust to common pressures, such as glo-

balization and technological change, by safeguarding the traditional coordinating

institutions—regulated labor markets and generous social protection—that incentivize

the acquisition of specific skills and underpin a comparative advantage in incremen-

tally innovative industries (i.e., traditional manufacturing).2

In Germany, the archetypal coordinated market economy in the VoC framework,

however, the transition to the knowledge economy has come with major disruptions in

political-economic institutions. CPE scholars have therefore turned their attention to

assessing the far-reaching institutional changes that have taken place and the extent to

which they undermine the “German model.” Two approaches have come to dominate

the literature in this field: the dualization and liberalization perspectives. The former

argues that institutional change has been largely confined to the service sector periph-

ery and that traditional coordinating institutions still operate relatively unchanged in

the core manufacturing sectors.3 Conversely, the latter argues that sweeping institu-

tional change in a liberal direction has been a key feature of both the service sector and

the industrial core in recent decades.4

The key site of contestation between these existing perspectives is the manufactur-

ing sector, but both these perspectives are missing an important part of the story, as

they fail to adequately account for the fundamental transformation that advanced

manufacturing has undergone during the transition to the knowledge economy. The

increasing importance of information and communications technology (ICT) to prod-

ucts and production processes in manufacturing means the sector has changed beyond

recognition in recent decades. Take the global automobile industry as an example.

While the ICT equipment and software in a typical car contained around 100 lines of

computer code in the 1970s, that figure is close to 10 million today. It is also esti-

mated that ICT now contributes 30–40 percent of total value added in automobile

construction.5 The changes on the production side have been no less dramatic, with

the rapid proliferation of automation in the sector; between 2012 and 2017 alone,

industrial robot sales to the global automotive industry increased by 14 percent per

year on average.6 As a leader in the global automobile industry, this transformation

has profoundly affected the German manufacturing sector, with rising spending on

product innovation, the creation of a large number of jobs in white-collar occupations

and R&D, and an increasingly high-skilled workforce.7

In this article, we propose an alternative perspective on Germany’s transition to the

knowledge economy that seeks to address the crucial shortcoming of the existing lit-

erature. We argue that the evolution of the German political economy since the turn of

the century is best captured through the lens of liberalization and technological change,

which we conceptualize as skill-biased liberalization. Our approach draws on theories

Politics & Society 50(1)

118

of technological change from labor economics.8 In particular, we argue that (1) a surge

in the ICT-intensity of manufacturing has shifted the skills needs of manufacturing

firms toward workers with tertiary education, especially in STEM (science, technol-

ogy, engineering, and mathematics) subjects; (2) the increased centrality of high-level

general skills in advanced manufacturing has weakened the traditional institutional

complementarity between specific skills, regulated industrial relations, and generous

social protection; and (3) liberalization across the industrial relations and social pro-

tection arenas has been instrumental for high-end exporting firms to concentrate wages

and benefits on highly educated workers.

In order to assess the empirical support for our alternative perspective, we explore

changes in the German manufacturing sector and three key spheres of the German

political economy (skill formation, industrial relations, and social policy) by drawing

on descriptive statistics, industry reports and surveys, union publications and state-

ments, and a set of twenty-one elite interviews with key stakeholders in German man-

ufacturing. We find strong support for our alternative skill-biased liberalization

perspective and demonstrate that it fits the empirical evidence better than the existing

dualization or liberalization perspectives.

The article proceeds as follows. In the next section, we present the existing litera-

ture in greater detail and develop our alternative theoretical perspective. We then dis-

cuss our data collection, before presenting the empirical evidence in support of our

argument. We first trace the changes that have taken place in the German manufactur-

ing sector, with a specific focus on the increase in ICT intensity. We then examine

institutional and policy changes in the three key spheres of skill formation, industrial

relations and labor markets, and social protection. Last, we discuss the implications of

our research for the CPE literature and provide concluding remarks.

The Transition to the Knowledge Economy in Germany:

Dualization, Liberalization, and an Alternative

Theoretical Approach

Explaining patterns of institutional change in Germany’s political economy has been a

focal point of recent debates in CPE scholarship, owing to the centrality of the German

case in seminal contributions to the discipline. The point of departure for much of the

debate has been the varieties of capitalism framework and the dichotomy between

liberal market economies (LMEs) and coordinated market economies (CMEs).9 The

VoC framework implied that CMEs—typified by Germany—would navigate the tran-

sition to the knowledge economy by doubling down on their comparative advantage in

incrementally innovative sectors, owing to a specifically skilled workforce nurtured

by a set of institutions that included regulated labor markets and generous social

protection.10 That proposition has been challenged by recent empirical developments,

including a number of far-reaching reforms that have disrupted the core institutions of

the “German model”—most notably, but not exclusively, the Hartz reforms of the

early 2000s. The key question in the literature has thus become how to account for

those disruptions and their wider ramifications. In providing different answers to the

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Diessner et al.