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August 1995, Volume 2, Number 8

Regulating the German Labor Market

Germany probably spends more to prevent the employment of illegal foreign workers than any other country; about five times more per worker than the US.

In 1994, there were over 78,000 inspections of German employers suspected of employing illegal aliens, and almost half (42,000) led to fines of DM 24 million (US $17 million) and/or warnings. The INS fined US employers $11 million in 1994 for employing illegal aliens and/or not completing I-9 forms.

Germany has about 1,500 labor market inspectors and, at an annual cost of about DM 100,000 (US $70,000) per inspector, the Labor Ministry spends about DM 150 million (US $110 million) annually to, e.g., prevent German workers from drawing UI benefits while working and to prevent illegal foreign workers from finding jobs. In a labor market with about 40 million workers, Germany spends almost $3 per worker on labor law enforcement.

The US, by contrast, had 245 INS worksite investigators in 1994, and an additional 900 Department of Labor inspectors. At an average cost of $75,000 per inspector, the US spends $86 million annually on federal labor law enforcement, or $0.66 per worker.

German officials believe that the desire to preserve a generous welfare state and an orderly labor market helps them to obtain the resources necessary for effective enforcement. For example, German labor inspectors can obtain local police support for worksite inspections at no cost to the labor ministry; when four or five labor inspectors enter a construction site, for example, they may have 50 or 100 local police to surround the site and prevent workers from running away.

German enforcement officials report that German firms try to avoid negative publicity, so they tend to pay rather than contest fines. If a German firm contests a fine, its name can be made public. Fines are registered with local chambers of commerce, and public agencies and other firms can require employers bidding for contracts to provide information about that firm's labor law violations.

The German Labor Ministry announced that it would conduct intensive investigations of illegal employment in Brandenburg, the state surrounding Berlin, beginning in summer 1995. Berlin is currently the largest construction project in Europe, and perhaps the world, and thousands of foreign workers have streamed into the city to seek construction jobs.

There are currently 43 labor inspectors in Brandenburg, a labor market with just under one million workers. For the next two years, another 150 inspectors will be added, which means that in the Berlin area, DM20 million (US $14 million) per year, or about $14 per worker, will be spent to detect and discourage labor law violations.

The employment of legal foreign workers from elsewhere in the EU in Berlin prompted the German Labor Ministry on June 27 to push for a new law to raise the wages that must be paid to EU construction workers in Germany beginning in Fall 1995.

Under the so-called Entsendereglung proposal, EU construction workers with freedom of movement rights would have to be paid at least the minimum wage negotiated between German construction unions and construction companies, currently about 20DM (US$ 14) per hour, plus offer them the same vacation pay available to unionized German workers [payroll taxes add about 70 percent or DM 14 (US $ 10) to the hourly wage for German workers]. Employers violating this law, which would remain in effect only for two years, could be fined up to DM50,000 (US $ 35,000).

The opposition SPD claims that the new law does not go far enough and wants the government to require employers to pay all workers in Germany full German wages and benefits. The SPD would also ban low-wage workers from all industries, not just construction.

The 1.4 million workers in the German construction industry, plus 800,000 in associated industries, include about 150,000 foreign workers. The foreigners include 110,000 from EU nations such as the UK, Ireland, and Portugal, and 35,000 East Europeans, mostly from Poland and the Czech Republic.

Foreign workers are paid as little as DM6 (US $ 4.25)per hour, and they do not receive German benefits, since they are considered employees of e.g., British or Irish firms and temporarily assigned to Germany. EU workers have the right to enter Germany and seek most jobs on an equal basis with German workers.

In several cases, Dutch firms founded construction firms in Portugal, and the Portuguese firm made an agreement with a German firm to provide workers for DM 20 to 30 (US $14 to $20) per hour. The Portuguese workers were paid DM 6 to 8 (US $ 4.25 to $5.60), and the Dutch firm kept the difference, satisfying all parties involved, but producing unemployment and complaints from German construction workers.

Many foreigners are prepared to perform tasks deemed too dangerous by German builders. Most work a 70-hour week, almost twice as long as their German counterparts.

There are currently 137,000 unemployed German construction workers, and bankruptcies among small German construction firms rose 24 percent in 1994 over 1993. Unemployed German construction workers receive an average DM40,000 (US $ 28,000) per year in unemployment insurance benefits.

In addition to employing EU workers at lower-than-German wages, many British workers allegedly claim to be self-employed carpenters or masons who migrate to Germany to offer their services under the freedom of services provisions of the EU. Germans allege that they are not truly "independent contractors," and thus are not exempt from payroll taxes and minimum wages because, inter alia, they are often (illegally) supervised on German work sites, and they are not enrolled in local German associations of independent contractors.

Germany has proposed that all independent contractors from other EU countries be required to register with the local craftspersons' association, which would review each applicant's credentials before granting certificates.

A sweep of hotels and restaurants involving 3,600 inspectors and police in March 1995 found that 830 of the 3,600 restaurants checked had illegal foreign workers. About 6,000 or 43 percent of the 15,000 employees were foreigners who were required to have work permits, and 1,300 of them (22 percent) did not. Two-thirds of the 15,000 restaurant employees did not have their social insurance cards on them, as required in construction, hotels and restaurants, and in fairs and other temporary exhibitions.

Germany continues to debate whether its regulated labor market and social welfare system slows down job growth and increases unemployment. Between 1982 and 1993, Germany created 3.25 million net new jobs, and an additional 1.4 million net new jobs are expected to be created by 1999. German firms created an estimated 70,000 jobs abroad in 1994, a trend that worries those who want to preserve Germany's lead in manufacturing. German employers argue that Germany's high business taxes must be reduced, and that labor market and business regulations eased in order to keep Germany competitive.

The argument over whether an inclusive social safety net hurts competitiveness is being waged in many European countries. Employers complain that strict labor laws discourage weekend and night work, so that expensive capital equipment is not fully used, while sick leave that averages one month or 22 days per year, plus four- to six-week paid vacations, leave German workers with too few workdays.

German employers recommend relaxing labor laws, ending store closing requirements--most stores must currently close at 6:30 p.m. and on Saturday afternoons and Sundays--and permitting households to deduct the wages paid to maids, which employers estimate could create an estimated 500,000 to 600,000 jobs.

There have in 1995 been fewer predictions of the German and European "need" for immigrants to offset the demographic reality of aging populations and declining labor forces. The EU commissioned studies in 1993 that concluded that, without immigration, the EU population would decline by about three percent between 1990 and 2020, to 333 million and, at current labor force participation rates, the EU labor force would decline by eight percent, from 157 million to 144 million.

To maintain the EU population and labor force at early 1990s levels, the EU would have to admit 900,000 immigrants annually, including 400,000 per year into Germany, 200,000 per year to Italy, 80,000 per year to Spain, 60,000 per year to France, and 50,000 per year or less for the all other EU nations except Ireland.

Correction: The July 1995 issue of Migration News mistakenly reported that German negotiations with Vietnam were concluded and repatriations would begin in summer 1995. A final agreement was not signed until July 21, 1995.

Under the agreement, about 40,000 Vietnamese nationals in Germany without valid documents are to be returned to Vietnam. The final sticking point in the negotiations was Vietnam's demand that those being deported from Germany are in fact Vietnamese citizens. It was agreed that nationality would be determined by birth certificates, seaman's papers, drivers license, witnesses, or the person's own admission. Germany has also agreed to give Vietnam US $72 million in development aid.

There is some dispute about the number of Vietnamese living in Germany and how many are subject to repatriation. Of the 60,000 Vietnamese who were working in East Germany in 1989-90, about 15,000 are still in Germany. Over 80 percent of them have a residence status that will allow them to attain permanent residence by 2001, which is in some cases 19 years after their arrival.

Some Vietnamese residents--including rejected asylum seekers-- have a "Duldung" ("tolerance"), which in most cases does NOT allow them to work. These Vietnamese could be repatriated under the agreement. Together with asylum-seekers whose applications have not yet been decided, but who are likely to be rejected, some estimate that 20,000 Vietnamese could be deported, although most newspapers quote the government's 40,000 estimate.

Leon Mangasarian, "Bonn wants ban on cheaper workers from fellow EU states," Deutsche Press-Agentur, July 25, 1995. Michael Lindemann, "Bonn to Boost Border Troops," Financial Times, July 24, 1995. "Germany Gives Green Light to Deport Vietnamese from Hanoi," Deutsche Press-Agentur, July 21, 1995. "In the negotiations, Germany had already agreed to provide aid worth 100 mil," Agence France Presse, July 21, 1995. Denis Staunton, "New law could send Irish workers packing," Irish Times, July 18, 1995. "Konkurrenzkampf auf deustschen Baustellen," Die Welt, July 18, 1995. "Talks on Vietnamese deportation from Germany begin in Hanoi," Deutsche Presse Agentur, July 3, 1995. Ascarelli, "German industry official cites problems created for country by exporting jobs," Wall Street Journal, June 30, 1995.