Learning from others: Kurzarbeit in Germany

Anyone who has seen the news anytime in the past few months knows that the USA isn’t the only place in the world with severe economic troubles right now.  The Eurozone has been struggling with the near-collapse of many major economies within the EU, the most prominent ones being Greece, Ireland, Portugal, Spain and Italy (seems like having a nice coastline causes economic crisis).  For years, there has been a push in America to be more “European” in our financial and social policies, however, with the recent economic crisis going on in Europe, that push seems to have died down a bit.  Now anyone that suggests that America be more like Europe is met with criticism from those suggesting that the economies of the struggling European nations aren’t exactly the best model for our country.

This is, of course, rather selective.  One needs to look no further than Germany to understand how America’s economic policies could have been better adapted to protect against the major financial crisis that we’re in.

The peak of Germany’s unemployment rate during this financial crisis came in August of 2009 and reached a rate of (hold on to your seats ladies and gents) 7.8%.  In fact, the unemployment rate as of today is 6.1% and still declining.  Germany’s unemployment rate at the moment is even better than it was BEFORE the crisis even began!

So what’s the secret to maintaining relatively low unemployment?  As many people are well aware, Germany’s economy is heavily dependent on exports, especially in the area of manufacturing.  This is where the idea of “Kurzarbeit” (German for ‘short-work’) comes in.  During a recession, rather than laying off employees to cut costs during periods of reduced demand, companies enter into an agreement with the government where working hours are reduced for most or all employees.  The government then pays these employees to make up for some of their lost income.  This results in lower hiring and severance costs to the employer, reduced unemployment costs to the government, and sustained demand for goods and services.

Another issue lies within the manufacturing of the industries themselves.  In order to stay competitive on a global scale, companies like BMW, Audi and Mercedes realize that they cannot compete on cost, especially given the low cost of labor in developing nations.  They instead form their competitive advantages based on quality an customer satisfaction.  Even with the strength of labor unions, high costs and standards of living, benefits and pay in Germany, companies still remain competitive because the products they produce are high quality and innovative.

In my personal opinion, I think that this is something the USA needs to focus more on.  In this country we have some great engineers and some very innovative talent, but if we focus on all of our attention on competing with cheap labor in China, we’ll drive ourselves out of business.  The USA should be competing with Germany on quality an innovation, not with China on price.  As we transition from a manufacturing to a services economy, it becomes even more vital that American companies seek a way to diversify themselves and provide additional value to their customers all over the world.

Work and play in Germany and America

Having worked and done internships in both the USA as well as in Germany over the past few years, I’ve noticed some major and minor differences in the way that we conduct business, both at a company level as well as a national level.

The average work day:
One great thing about my time spent working in the USA is that, more often than not, my schedule has been quite flexible.  While I’m sure some of this is due to the nature of my work, I can’t help but feel that there’s a cultural aspect to it as well.  In previous decades, working 9-5 was deemed to be the average workday, though it seems now many people work later, work on weekends, work virtually or take their work home with them.

I bring this point us because it stands in stark contrast to the way my work day was when I worked in Germany.  I would typically always take the same morning bus to work and the same afternoon bus home, and thus my workday was almost exactly 8 hours from 9 to 5.  Few people work later than 6 and apparently it is a sin to work on weekends (especially Sunday).  I think there’s also a bit more of a separation-of-work-and-home mentality in Germany as well.  I remember speaking with a coworker of mine one day, and asked him that, since he had so much work to do, if he would be working from home that evening.  He told me “What, are you insane? You don’t take work home with you! If people started doing that, it would ruin their personal lives.  The office is for work, home is for my personal life.”  I personally found this to be quite striking, given how common it is for many Americans to stay involved with their work even off the clock.

Vacation time:
Anyone seeking an internship anywhere in the world right now can expect very little, if any, compensation (other than experience of course).  I was one of the lucky few with an internship that covered my costs of living.  Both in the USA and Germany, my internships paid a reasonable sum that helped cover my living expenses, as well as a little extra for travel on the weekends.  The difference, however, was in vacation time.

Any intern in America is insane if they think they’ll get paid vacation time for working for a company for 3-4 months.  Most full-time employees are lucky if they can even get 3 weeks.  That is why I found it interesting that, while interning in Germany, my supervisor came to me one day and told me that I was to receive the equivalent of the standard 6 weeks of paid vacation (7.5 days for 3 months).  One wonders how the German firms can give so much vacation time and still stay in business, but I suppose the short answer is: everyone is doing it. If every company in your industry offers 6 weeks of vacation per year, it no longer becomes a competitive advantage/disadvantage, it’s simply the culture of the industry.

Facebook layout updates – Innovation or stagnation?

It seems like clockwork. Every 3 to 4 months, I log into Facebook, only to be bombarded with status updates like the this:

OMG!!! They changed the layout AGAIN! I hate it and I’m never using Facebook again!

But even more common are those who criticize the critics:

OMG!! Shut up about the new Facebook update! Just accept it, get used to it, and move on.

Now I’ll admit, both sides have their points, but it’s important to dig deeper in to this issue.

It’s understandable that people are upset by the changes in Facebook. Most people are reluctant to change, especially with something that already has a bit of a technological learning curve.  On the other hand, however, Facebook needs to be a source of constant innovation in order to stay competitive in the social media industry. The real issue with Facebook’s updates is that they come often, without much warning, and rarely do they ever change anything significant.  Previous updates have led to new innovations, such as the idea of Facebook “pages”, Facebook chat, privacy features and groups, but recently it seems as if they are more focused on the news feed.

What people need to realize is that it’s necessary for Facebook to make updates in order to stay in business, however, it’s also important that Facebook recognizes some things too.  First is that rearranging how I read my news feed, is not innovation, it’s simply an irritation.  Facebook’s list of new features in recent updates seem to include: something something something news feed, something something something top news, something something something recent stories and something something something chat box.  In the past, Facebook gave users far more options to customize their home page display.  Now it seems as if we’re stuck watching a constant feed of “Who’s online now” and “who just became friends with who” and “who likes what”.

My suggestion is that Facebook focus on making fewer, but bigger, more meaningful, more innovative, more publicized updates and giving users the option of implementing the new updates early over the course of a few months.  Facebook should also focus more on updates that people want, rather than simply implementing updates they think users want.

Another way of looking at this would be to think of your living room.  Now imagine that, every 3 to 4 months, someone sneaks into your living room, rearranges the furniture, and then bolts it to the floor, seemingly haphazardly.  Then imagine that, every so often, they started bringing in and bolting down new furniture in your living room.  While it may be nice to have new things in the beginning, eventually people will reach a tipping point where they prefer an empty room with a single chair and a television, to a cluttered room full of furniture.

In much the same way, Facebook has gone from being simplistic and clean, to a cluttered mess of information I couldn’t care less about.  Myspace went down the exact same road.  Once more and more features were added and things got more cluttered, people began to search for alternatives.  Changes like this prompt people to search for alternatives, and Google has already taken note of this.  Google has stripped away everything but the bare essentials of a social media website, giving people a much more user-friendly and intuitive design. Just this morning I noticed that at least 8 (approx. 1%) of my friends signed up for Google Plus accounts which may not seem like much, but over time, it poses a serious threat to Facebook’s market.  Once Google Plus reaches it’s point of critical mass, people will shift from using both social networks, to solely using Google Plus.  It happened with Friendster and Myspace, and it could happen to Facebook.  As for now, it will be interesting to see whether or not Facebook responds to the demands of their users, because that will likely determine their long term success or failure.

Courtesy of xkcd.com

A Free Education?

Anyone that knows me well knows that I have a slight obsession with Germany (maybe it has something to do with the fact that I’m a German minor).  Anyone that knows me well will also know that, over the past year, I’ve spent quite a bit of time over there traveling, working and studying in Germany.  For now, I’d like to take a moment and focus on the latter.  I will note that most of what I’m going to discuss is simply a generalization of most of my friends at Uni Paderborn.

When I attended Uni Paderborn in 2010-2011, I made several observations that struck me as odd when compared to my experience in America at ISU.  The first was that students pay nothing for tuition to attend the university.

For many years, students in Germany paid no tuition to attend a public university.  In 1997 universities began to implement fees from zero to 500 Euro per semester, much to the anger of the students.  Due to the massive uproar from students, many states, such as Hesse, Saarland and North Rhine-Westphalia, have already stopped charging tuition fees for the coming semesters.

Now, to me, this concept appears absolutely bizarre, given that I come from a public university in Illinois that charges over $300 per credit hour, and often times a semester of tuition can cost well over $5,000.  In fact, looking back over the last 25 years, the cost of tuition at Illinois State University has increased 356% faster than the cost of gasoline.

I could go on and on about university funding, lack of state support, and the ridiculous costs of tuition at public universities in the USA, however, I’d like to focus on the economic advantages of university life in Germany.

Another thing I noticed when studying abroad was that, not only to people not have to pay for tuition, but often times students live at home with their parents, rarely paying for rent and food.  In addition, most students take public transportation and, if they do have a car, it usually belongs to their parents. I also noticed that, for most classes, students simply borrow the course books from the library for free and very seldom do professors require that the students purchase a new book each year.

Add on to this the fact that most Germans tend to rent apartments as opposed to buying houses and you have a completely different economic outlook upon graduation.

The average student in the USA graduates with over $24,000 in student debt.  Between student loans, car payments, car insurance, food, and potential house payments, students in the USA bear a heavy load upon graduation.  Many of my German friends, by contrast, pay nothing for tuition, books, rent, car payments, insurance, gas, etc. and graduate with minimal if any debt.  It’s no wonder so many of my friends are going on for their masters or PhD, it’s ridiculously cheap by US standards.

Having the ability to graduate with zero debt, with no financial obligations like car or house payments can be incredibly valuable in a struggling economy.  Perhaps if we’d like to fix our economic crisis long-term, we should take a look into how to reduce the debt of those students upon entering the work force.

Do Germans really pay more taxes than Americans?

At a recent speaking event I made a bit of a controversial statement that I’ve received some flak for.  During my speech, I told the audience that “The average American would pay less taxes in Germany than the USA”.  Standing by my point, I’d like to take a moment to analyze the tax structure of the two countries.  I’d like to note that I’m only taking into consideration the taxes that come out of your paycheck, not including healthcare, pension, etc.

First, let’s examine income taxes in the USA:

Federal Income tax in the United States ranges anywhere from 10% to 35% depending on your income. The tax brackets are as follows: $0 – $8,500 (10%), $8,500 – $34,500 (15%), $34,500 – $83,600 (25%),  $83,600 – $174,500 (28%), $174,000 – $379,150 (33%) and $379,150+ (35%).  The tax is a progressive tax, meaning that every dollar you make up to $8,500 is taxed at 10%, the next $26,000 is taxed at 15% so on and so forth.  This leads to the signature stair-step look that I’ll discuss later.  In addition to the Federal Income tax, Americans also pay a 1.45% gross income tax for Medicare and a 4.20% gross income tax on Social Security (though you are not taxed on any income over the Social Security Wage Base of $106,800).  Finally, most states have an income tax that is deducted each payday from net income.  Some states have a progressive state tax, while my home state of Illinois has a flat tax of 5% (Note: I will be using this number for future calculations).

Now let’s examine income taxes in Germany:

Germany’s tax structure is a bit different.  No income tax is charged on the basic allowance, which is €8,004 for unmarried persons and €16,008 for jointly assessed married couples. Beyond this threshold, the marginal tax rate increases linearly from 14% to 24% for a taxable income of €13,469 (€26,938 for married couples). In the subsequent interval up to a taxable income of €52,881 (€105,762 for married couples), the marginal tax rate increases linearly from 24% to 42%. The last change to the occurs at a taxable income of €250,730 (€501,460 for married couples) when the marginal tax rate jumps from 42% to 45%. (Note: numbers may be different due to the exchange rate)

Having trouble picturing all that in your head?  Take a look at the following graph.

This graph shows the marginal tax rates in both the USA and Germany.  The USA is represented by the blue line, Germany by the red.  It should be noted that, in this graph, tax rates for personal income tax, social security tax and medicare tax have all been added together.  Looking at this graph, it appears the USA has marginally lower tax rates than Germany, given that Germany’s tax bracket skyrockets from 24% to 42% between $19,530 and $76,677.  What is more important, however, is to take a look at the EFFECTIVE income tax rates, shown here in the light blue and red lines.  Because Germans do not pay tax on any income up to €8,004, it slightly reduces the effective tax rate.  This combined with the fact that the taxes increase linearly for the first two tax brackets, gives Germany an effective tax rate lower than that of the USA up to a point.  This point, depending on the exchange rate, is around $107,500.

Below is a better look at the effective tax rates in the USA and Germany.

To put this into perspective, the median family income in the USA is currently right around $40,500.  If you are an American that makes $40,500 per year, you would pay a combined total of $8,538.25 in Federal, Social Security and Medicare taxes along with $1,598.09 for state tax in the state of Illinois.  This would leave you with a net income of $30,363.66 for an effective tax rate of 25.03%.  The same person in Germany would pay nothing on their first  €8,004 (~$11,605) earned, and would pay a total of $7,230.93 on their total income, keeping the remaining $33,269.07, an effective tax rate of 17.85%.

Let’s recap: someone making an average American salary of $40,500 would pay an effective tax rate of 25.03% in the USA and 17.85%.

Just food for thought.

CouchSurfing

I hate to start off-topic, but given my recent travels and experiences, I’m often asked about CouchSurfing….

I joined CouchSurfing.org back in 2009, as a friend in one of my classes had told me some stories about a friend of his who CouchSurfs quite a bit.  Before I dive into details too much, I’d like to take a moment to explain exactly what CouchSurfing is.

CouchSurfing.org is an online network of people who have graciously opened up their homes for fellow travelers.  Members can contact one another and request to stay on their couches free of charge.  The ultimate goal of CouchSurfing is not only to provide a cheap place for travelers to stay, but ultimately to give them the experience of staying with a local, someone who knows the area, the language, and can introduce them to the aspects of the city they may not already be familiar with.  CouchSurfing isn’t just about hosting and surfing either, many members use it simply to find people to get coffee with, or to find someone to show them around the city for the afternoon. The possibilities are truly endless.

In my experience with CouchSurfing I have had nothing but good experiences.  I have hosted people, surfed with people, attended events, traveled with people, gotten coffee and drink with people and even given several members tours of the city that I was living in.  In the end, it’s about a sense of community and showing that the world is so much smaller than you really realize.

About now you’re probably wondering how safe all of this is.  Anyone who has ever done business online knows that everything comes with a certain risk.  With CouchSurfing, members are allowed to post feedback on another members profile, something that can be edited by the poster, but not removed or hidden by the other member.  Any feedback can be marked as positive, neutral or negative, giving future members an idea of what that person is like. It’s much like eBay in the sense that a few negative references can ruin your entire account and building up positive references takes a lot of work and trust from the people in your community.  Members can also get verified which links their account to a physical address, providing an extra measure of security.  Neither I nor anyone I know has ever had any bad experiences with CouchSurfing.  In fact, my friend Karen and I were interviewed by a newspaper in Germany to talk about all of our positive experiences with CouchSurfing.

If you’ve got a moment, check it out and give it some thought.  Even if you’re not a traveler, hosting someone can be an incredibly rewarding experience.  Many surfers also join groups in their area and meet up for events on a regular basis to establish a sense of community and accountability.  Check out your local CouchSurfing group, you may be surprised with the people you’ll meet!

Back to Blogging

Hello World!

I’m back in the blogosphere…again, though this time I aim to maintain a WordPress blog that will be updated on a regular basis.  I had toyed around with the idea of starting a professional blog, starting a personal blog, starting a themed blog, or a combination thereof, however I’ve come to the conclusion that this blog will be used as a thinking space – my thinking space – to toss around ideas, respond to the ideas of others and post things I find interesting in general.  My posts here will (hopefully) be more focused, centered around the themes of marketing, innovation, economics and critical thinking, though I may deviate occasionally to discuss other things that spark my interest.