After spending more than a month this summer living in a rural part of Eastern Germany, I discovered that the source of Germany’s economic strength extends far beyond the fields at the World Cup.
In speaking with locals and with students from all over the country, I learned that the German middle class is much larger and has better working conditions than in the U.S. According to recent income data, approximately 51% of German households are in the middle class. In contrast, less than 34% of U.S. households are in the middle class.1
Although it can certainly be argued that the reason Germany’s sizable middle class enjoys a high quality of life is because of its strong social safety net, there is another very important reason that is not as commonly discussed.
Germany does a better job educating and training its workforce. It has remained a competitive industrial country in an era of globalization because its workforce is properly trained for employment positions that are in demand.
I will compare the role of private and public universities in the U.S. and in Germany and the prominence of practical training in Germany. I will also discuss the government infrastructures that give German workers financial security.
Education
The reputability and affordability of Germany’s public universities has largely helped strengthen the German middle class.
In contrast, the U.S. advanced education system contributes to growing levels of inequality.
The German middle class is strengthened by its public university system. All individuals in Germany can get a high-quality undergraduate education from a public university at no cost. University graduates generally enter the workforce without debt and with skills desired by employers.
By stressing the importance of learning by doing and providing affordable higher education programs, Germany has maintained a robust middle class and low levels of unemployment regardless of global economic conditions.
In the U.S., a degree from a private college is generally much more highly regarded than a degree from a public university. That is, we can assume that graduates from Connecticut College have better job prospects than graduates from the University of Connecticut.
The widely held belief that American private colleges are more prestigious has even been confirmed by empirical studies. A New York Times article stated that “Among the most cited research on the subject — a paper by economists from the RAND Corporation and Brigham Young and Cornell Universities — found that ‘strong evidence emerges of a significant economic return to attending an elite private institution, and some evidence suggests this premium has increased over time.’”
Surprisingly, in Germany, the opposite is true.
German employers actually prefer to hire graduates from public rather than private universities.
This is because employers assume graduates from Germany’s private universities were incapable of graduating from a public university. Germany’s private universities can cost up to 30,000 euros (approximately $41 000), and there is a presumption that wealthy families sending a child to a private university are simply buying the student a diploma.
There are 250 German universities, with the majority funded by the federal government. Students at public universities are not required to pay tuition.
Moreover, there are countless generous federal grants and loans readily available to these students for living expenses. For example, the German government offers students a no-interest loan of up to 670 euros ($910) per month. Approximately 26% of current students in Germany benefit from this loan. These students are only required to pay back half the loan amount, and payments begin five years after they start studying for bachelor’s degrees. The size of the loan is based solely on a student’s parent’s income and expenses. Also, if the student finishes in the top of 30% of the graduating class, the loan repayments will be 25% lower.
Students who attend German public universities generally graduate with little to no debt. Their studies typically require some form of practical training, and their diplomas are highly regarded around the world.
American private colleges are very expensive, typically costing $50,000 per year. Several studies have shown that children born into wealthier American families have better prospects of attending these elite institutions.
The American higher-education system has exacerbated inequality because graduates from expensive private colleges usually have higher incomes than graduates from public universities. This system has contributed to the shrinking of the American middle class.
Practical training
Germany’s economic strength is largely a product of its emphasis on practical training.
In Germany, both companies and the government fund job training and vocational education programs. These programs allow individuals to acquire skills required to get the middle-class jobs that are most needed. This is especially evident in the manufacturing and service sectors.
Most university students in Germany are required to complete an internship in their field of study as part of their undergraduate studies. But not all students choose to attend university. Approximately 60% of young people in Germany participate in the vocational education and training (VET) program. This is commonly known as the “dual-system,” since it consists of both part-time classroom vocational education and an apprenticeship.
Many of Germany’s most successful private companies collaborate and support the VET program by providing apprenticeships in which students receive practical training. According to a Bloomberg News article, one of the key strengths of this system is that students are guaranteed a job upon completion of the program. A student is only admitted to the VET program if an employer has offered a training contract.
In most countries, including the U.S., there is a stigma that vocational school is a fallback for those who failed in university. But in Germany, this is not the case.
The VET program is well respected in German society and allows individuals to obtain occupational proficiency within a field of study to meet the changing demands of the workplace.
The emphasis on learning by doing that is part of the formal German education system is also prevalent in the corporate training programs that are not government affiliated. Most German companies offer job-training programs to all their employees every year.
In 2010 (the most recent year for which data are available), 73% of German enterprises offered vocational training to develop the skills of their employees. This commitment to increasing worker productivity is especially prevalent in large firms — 96% of companies with at least 250 employees funded corporate training in 2010.
For example, the telecommunications provider Deutsche Telekom is one of Germany’s biggest companies. For years, Deutsche Telekom has also been one of Germany’s largest training providers. In 2012, approximately 9,500 Deutsche Telekom trainees participated in cooperative education programs. Deutsche Telekom, like many German firms, provides practical training to both its current employees and to new hires. “Telekom Training” consists of a wide range of vocational trainings for employees such as information technology e-learning and English language classes.
The German government states that a “comprehensive system of education and vocational training is a major reason for Germany’s economic strength. Young people and companies can expect that their efforts in the field of education are part of a system which ensures access, quality, mobility, and capacity for innovation.”
Germany’s emphasis on practical training is indeed resulting in a strong economy. In May 2014, Germany had an unemployment rate of 5.2%, compared to 6.3% for the U.S. and much higher rates throughout Europe. In addition, according to the Organization of Economic Cooperation and Development, Germans work 393 fewer hours per year on average than Americans do. A recent study by the Center of Economic and Policy Research reveals that this is because workers in Germany receive more paid annual leave and paid public holidays than workers in the United States. Having more paid vacation helps distribute work hours more evenly in the population, lowering unemployment.
Working conditions
Germany’s employment positions aren’t just enticing because they guarantee a generous amount of paid vacation. Workers in Germany are also entitled to substantial compensation and benefits.
Starting in 2015, Germany will implement a nation-wide minimum wage of 8.50 euros ($11.38). Currently, the U.S. federal minimum wage is $7.25.
German workers are also guaranteed benefits that many Americans struggle to afford.
Germany’s social insurance scheme has two main components; pension insurance and universal healthcare.
If you are employed or are a vocational trainee, you are compulsorily insured under the pension-insurance scheme. This insurance provides both retirement benefits and life-long coverage against incidents that reduce an individual’s earning capacity.
Also, almost all workers and vocational trainees receive compulsory health insurance. This program has a wide spectrum of benefits that include treatment for illnesses, preventative measures, medical rehabilitation and natal care. The statutory health-insurance institutions are required to accept all applicants, regardless of personal health risks.
The German retirement and healthcare systems have proven to be more effective than their American counterparts.
The Melbourne Mercer Global Pension Index compares and assesses retirement income systems around the world. According to the most recent index, the German pension system provides more benefits to poor and median-income earners than the U.S. pension system. The index also gave the German system better ratings than the U.S. system in the categories of governance and costs.
Moreover, a 2013 OECD study found that 19.9% of Americans over the age of 65 live in poverty. This figure is only 10.5% in Germany.
Germany’s healthcare system is also more efficient than the American system. In an interview, professor of health economics at Princeton University Uwe E. Reinhardt explained that the administration costs of the German healthcare system are approximately half of that of its American counterpart. His research also concludes that expenditures on drugs are substantially lower in Germany than in the U.S.
Germany’s federal labor regulations and social insurance allows all workers, regardless of their income levels, to have life-long financial security.
Conclusion
Many people believe that the German economy has benefited from a weak euro that has helped its export-driven industries. This is true, but it is an incomplete picture. A main reason that Germany’s economy is so strong is that it has a large middle class. The German educational system promotes equality and prepares individuals for middle-class jobs that are in demand. Germany maintains high levels of employment, and its social infrastructure has proven to be effective.
Marianne Brunet is an associate editor with Advisor Perspectives.
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