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Economic Enigmas

February 29, 2008

Unemployment rates might be falling, but a number of large companies are planning to cut jobs despite full order books and record profits. Karl Zawadzky wonders what's going on.

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The labor market is positively influenced by two main factors -- economic growth and the weather. Although Germany's upswing began to slow down again recently, the economy continues to grow -- not least because production capacities are maxed out, so any new orders increasingly lead to a rise in employment figures. Medium-sized businesses in particular, which provide the backbone of the German economy, are hiring extensively. Moreover, the mild weather meant the standard effects of winter on the labor market were not apparent this year. Usually, construction work, for example, is interrupted by snow and ice for weeks at a time -- but this year it could continue throughout the season. In this respect, climate change is positive, because it reduces unemployment.

There is nonetheless one unsettling development affecting the labor market: Large companies' intention to cut jobs on a massive scale, given that the money is rolling in and the order books are full. In many cases, these announcements come at the same time as the companies present annual balance sheets showing record profits and excellent prospects for the coming years.

The first German companies to be following this route include BMW, Henkel and Siemens, who are all intending to slash jobs. Finnish mobile phone market leader Nokia is planning to shut down its Bochum factories and shift production abroad. Truck and engine construction company MAN might not intend to cut back production in Germany but is focusing expansion in eastern Europe and Asia. In addition, the coal mines in the Saarland region are also set to close for geological reasons. Obviously, these cases cannot all be lumped together. But apart from the latter, they have much in common. In Germany, the days when a job with a large company was a job for life are long over. Anglo-American-style capitalism has put a stop to loyalty between companies, bosses and workers. Even in this country, the first priority is the need to boost yields -- a principle underscored by the fact that a majority of listed companies have foreign owners and shares are traded not only in Frankfurt, but also in New York. Financial investors play a major role for the large companies. And financial investors are interested first and foremost in increasing stock exchange value, followed by increasing dividends.

It may seem bizarre, but according to the logic of the financial markets, an announcement of massive job cuts generally results in a sudden increase in stock exchange value. So when the workers lose their jobs, the investors are usually laughing all the way to the bank. It's a different story with the medium-sized companies. Many of them are run not by managers but by owners. An owner might want to see value and profit, but he or she will also want to see the company last long enough for his or her children to be able to take over. These companies are not necessarily designed with short-term yield in mind, but as long-term investments -- overseen by bosses who have a strong sense of responsibility to their staff and their families. But financial capitalism is making its presence felt here, too -- such as when the owner lacks an heir to take over.

There are other reasons why the owner might need to sell to a financial investor. One example is the clothing company Boss, bought by an Anglo-American private equity fund, an example of what is often referred to as "locusts." It demands not only a profit of 100 million euros per year, but also a special distribution of funds amounting to 400 million euros. That way it can recoup its investment, while Boss faces a mountain of debt.

Karl Zawadzky is DW-RADIO's business editor (jp)