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Excerpt from Morgan Stanley economist Stephen Roach's September 22nd essay:

I have always thought that a German turnaround would hinge on the productivity story. From this perspective, there are grounds for encouragement on three fronts — the labor market, IT spending, and corporate restructuring. Yes, Germany still has one of the world’s highest-cost labor forces, with hourly compensation in manufacturing of $32.53 in 2004 — nearly double the $18 average for the industrial world, according to the US Bureau of Labor Statistics. And, of course, the fixed costs associated with the hiring and firing of German workers remain prohibitive. The good news is that Corporate Germany has responded to this cost disadvantage by moving to an increasingly flexible work force. Germany’s so-called “flexi-workers” — part-time and contract temps — now make up over 40% of the country’s total labor force; that’s up over 10 percentage points from the flexi share of a decade earlier. Meanwhile, once powerful German labor unions have lost their swagger, and the shortened workweek has increasingly fallen by the wayside. Yes, Germany still has a very rigid, high-cost labor market — but less rigid and less costly than was the case just a few years ago.[...]

All this paints a far more compelling story for German productivity growth than has been the case in years. Interestingly enough, the numbers are now starting to hint at just such a payback. According to estimates made by Elga Bartsch, our German economist, productivity in Germany has been running at about a 1.7% y-o-y clip over the five quarters ending in 2Q06. While that pales in comparison to a much more vigorous US productivity revival, it does represent a marked acceleration from the anemic 0.7% annualized German productivity trend evident over the 1998 to 2004 period. And this may be just a start. After all, an important lesson from the US experience is that it takes time for the IT payback to bear fruit: The five-year US trend productivity comparison first accelerated to 2.5% by 2000 before rising further to 3.4% by 2004. Meanwhile, German productivity growth has now essentially doubled — off a low base, to be sure, but an impressive achievement nevertheless for any developed economy.

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