Germany's labor crisis is an economic time bomb

For years, German companies have been warning of a ticking time bomb at the heart of Europe's biggest economy: a shortage of skilled workers.

It has long been a source of anxious debate but it has intensified recently. Companies across multiple sectors say they are struggling to find the workers they need and that the situation is getting worse.

The German government thinks immigration is one of the solutions. It expects to pass extensive immigration reform legislation in the coming weeks which it hopes will make Germany a more attractive destination for foreign workers.

"Germany will lack 7 million workers by 2035 if we don't do something," the country's labor minister, Hubertus Heil, told the Financial Times this week. He shares the belief of many business leaders that the shortage will soon start to sap German growth if it hasn't started already.

A problem in multiple sectors

In many industries, the problem is already very much apparent.

"The lack of skilled workers is one of the central challenges for companies in the German automotive industry," Andreas Rade from the German Association of the Automotive Industry (VDA) told DW. He says a recent survey of suppliers found that more than three-quarters of companies have a severe shortage of workers at present.

It's a similar picture for the German mechanical engineering sector, long one of the big drivers of the country's huge export market.

"The situation has steadily deteriorated since 2021," Thilo Brodtmann of the VDMA trade body, told DW. He says more than 70% of companies in the sector have severe shortages and they expect it to get worse throughout 2023. "The consequence is clear: the shortage of skilled workers is slowing down growth," he said.

DW approached companies and trade bodies from various key sectors of the German economy, with near universal agreement that the skilled worker shortage was either the biggest or second biggest problem facing their sector, matched only by supply chain difficulties.

"Society is in a state of upheaval," Sabrina Pfeifer from ZVEI, a trade body for the German digital sector, told DW, saying the mass retirement of the so-called baby boomer generation in the coming years has created a 'war of the talents'. She says more than 40% of companies in the digital and electrical sectors are having problems filling positions, with the semiconductor industry especially hard hit.

Stefanie Sabet from the food and beverages industry trade body ANG says rural regions are particularly badly hit. "It now takes an average of one year to fill positions," she told DW.

The skills shortage is also a threat to Germany's goal of becoming more digitized and technologically innovative says Jörg Mayer from Spectaris, which represents German companies in the fields of optics, photonics and medical technology.

"We have a big problem here," he told DW. "The lack of suitable personnel is increasingly jeopardizing competitiveness and innovation." He says a lack of trainees is a particular concern.

Germany's dual education system, which combines vocational training with apprenticeships, has long been seen as one of the keys to the country's economic prowess. However, fewer and fewer people in the country are taking up positions within it. In 2022, a total of 469,000 people took up apprenticeships, around 100,000 fewer than in 2011.

"The fact that the market is changing is undisputed," says Sebastian Kautzky, managing director of the chemical industry trade body BAVC. "In dual training, it is becoming increasingly difficult to fill all the places offered."

Full employment yet not enough workers?

Despite the chorus of concern from multiple industries, some experts have pointed to Germany's record high post-unification employment rate and record low unemployment rate as evidence that the labor crisis is not as bad as presented.

Around 45.6 million Germans were employed in 2022, more than at any time since 1990, while the unemployment rate sunk to 2.8%.

Earlier this year, German labor market specialist Simon Jäger told DW that the country's high employment rate "speaks against a shortage of skilled workers."

Enzo Weber, a researcher with Germany's Institute for Employment Research (IAB), says labor has become more scarce in Germany since the mid-2000s and the market is now as tight as it has ever been.

However, he says that the high employment figures have given workers more leverage in negotiations with employers and that the skilled-worker issue is driven by a dramatic increase in companies' requirements rather than a collapse in the number of available workers.

"The number of available workers in Germany has not decreased," he says, but he cautioned that was likely to happen in the 2020s "as baby boomers retire."

Come and work in Germany (but you must speak German first)

What's clear is that for thousands of companies, the overall situation is getting worse. Heil, the minister driving the immigration reform known as the Skilled Immigration Act, is adamant that the legislation will improve the situation.

The bill will loosen Germany's stringent requirements on workers from abroad with qualifications recognized by Germany. The government will also push an international advertising campaign, dubbed 'Make It In Germany,' aimed at presenting Germany as an attractive and welcoming place.

Industry groups are cautiously optimistic but many insist the legislation does not go far enough. A common criticism is that it does not ease the existing strict requirements for prospective workers to speak German.

"The need for German skills is exaggerated," says Brodtmann from the VDMA. "Nowadays, a good knowledge of English is sufficient to work in most industrial companies."

Most also agree that the legislation must dramatically cut down on the high levels of bureaucracy typically experienced by those from abroad, especially from outside the EU, seeking to work in Germany.

They also insist that government investment in education and training must be ramped up to improve trainee numbers within the domestic labor force.

Andre Wilms from NWS, a foundation which focuses on getting younger people involved in engineering professions, says there is no single answer to the crisis.

"There is no simple solution to counteract the shortage of skilled workers in mechanical and plant engineering," he told DW. "Rather, various measures are required to promote young people, improve training and promote qualified immigration."

Sabet, from the food industry, agrees that immigration is only one part of the solution and she thinks more focus needs to be placed on overall working conditions. "A better work-life balance and less part-time and more full-time employment could significantly increase the potential of the labor force."

However, there is widespread agreement among economists and business leaders that the government's wooing of foreign talent needs to be a success if the German economy is not to become a victim of the country's emerging demographic deficit.

The IAB estimates the country will need to add 1.2 million workers from abroad every three years until the year 2060 to maintain an adequate labor force.

Edited by: Ashutosh Pandey