Labor Shortage

Putting the Brakes on Innovation

40971u source Harris & Ewing Office Work retrieved from the Library of Congress – 1936 office clerks administration
If only they knew what office work would be like with a computers. Source: Harris & Ewing [Office Work], retrieved from the Library of Congress

Invigorated by the strength of the economy, German firms are chomping at the bit to innovate. But they feel they’re being held back by the government’s chronic inaction, according to a major new study seen by Handelsblatt.

Three quarters of the 1,700 companies polled by the Association of German Chambers of Commerce and Industry (DIHK) said they would like to innovate more but struggle because they can’t find enough skilled people.

One in two firms see this problem as a risk to their future, according to the study obtained by Handelsblatt. Experts say the skilled labor shortage poses a threat to the overall momentum of innovation in Europe’s largest economy.

Germany has failed so far to reach its goal of investing 3 percent of gross domestic product in research and development. The government’s target of 3.5 percent by 2025 looks far out of reach, while Israel and South Korea are already at 4 percent.

“The problem must urgently be tackled in the next parliamentary term.”

Dietmar Harhoff, government adviser and director of the Max Planck Institute for Innovation and Competition

Around half of large companies in the survey said the labor shortage was putting a brake on their innovation plans. With small and medium-sized firms, known as Mittelstand, the percentage was far higher. “The gap between the big and the smaller companies is widening ever further,” said DIHK managing director Martin Wansleben.

This disadvantage is especially risky, because Mittelstand firms form the backbone of the country’s export-focused economy and employ the majority of Germany’s population. Innovation by the the small and medium-sized businesses has “truly become very difficult,” warned Dietmar Harhoff, chairman of a panel that has been advising Ms. Merkel on research and innovation since 2007. The problem might exacerbate in the long run. The shortage of skilled workers in Germany will drastically increase in the coming decades with the country lacking up to 3 million qualified employees by 2030, according to a forecast by research institute Prognos forecast.

Companies have been complaining for years about sluggish broadband investment and the dearth of qualified labor but these major obstacles went unmentioned in Sunday’s TV debate between Chancellor Angela Merkel and her Social Democratic challenger Martin Schulz, their only direct clash before the September 24 election. “The problem must urgently be tackled in the next parliamentary term,” Mr. Harhoff,  director of the Max Planck Institute for Innovation and Competition in Munich, told Handelsblatt.

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Experts say it is high time that Germany’s political parties lived up to their pledges to improve the tax environment for research. “Experience in other countries shows that tax incentives for research work,” said Michael Hüther, head of the Cologne Institute for Economic Research. “For every euro of tax incentives they receive, companies invest approximately one further euro out of their own pockets that they wouldn’t otherwise have invested.”

A few months ago, Ms. Merkel’s coalition of conservatives and Social Democrats had looked close to granting this long-held wish but failed to reach an agreement, partly due to opposition from Finance Minister Wolfgang Schäuble. The Cologne Institute estimated that the shortfall of people for technical and scientific engineering jobs currently amounts to 263,000 people. “That’s an all-time high,” said Mr. Hüther. Two thirds of these vacancies are skilled employees, such as electricians and mechatronic engineers.

Conservative lawmaker Michael Kretschmer said Germany urgently needs to beef up its so-called dual training system, a combination of classroom-based and on-the-job training. “Studying is still regarded as the be-all-and-end-all but the much bigger shortfall is with skilled workers,” said Mr. Kretschmer, a trained office IT specialist. “We must make much clearer how great the opportunities are for young people here.”

“A lot still has to happen in Germany to fundamentally improve the environment for startups.”

Dietmar Harhoff, government adviser and director of the Max Planck Institute for Innovation and Competition

But it’s not all bad news. The DIHK study showed that Germany is increasingly embracing new technologies and making more venture capital available. In 2015, more than half the companies surveyed said they felt obstructed by a lack of social acceptance of new technologies. That’s now fallen to a third. And the percentage of companies complaining about a shortage of venture capital has fallen to a third from almost 60 percent in 2015.

The DIHK attributed that improvement to Germany’s buoyant economic growth and improvements in the legal framework for providing venture capital, such as easier rules for carrying forward losses, better terms for development loans and new funds catering for innovative start-ups.

Still, Germany continues to lag behind countries such as Israel, Britain and the U.S. in this regard. “A lot still has to happen in Germany to fundamentally improve the environment for startups,” said Mr. Harhoff, the government’s innovation adviser. “We’re trailing other European countries when it comes to the availability of risk capital. Especially the smaller European countries are much more agile.”

 

Barbara Gillmann has been covering politics for Handelsblatt in Berlin since 2002, writing about education, research, family policy, demographic development and Germany’s Green party. Dana Heide is a political correspondent for Handelsblatt in Berlin, focusing on the Economics Ministry, digital policies, the Free Democratic party and small and medium-sized companies and innovation. To contact the authors: b.gillmann@handelsblatt.com and heide@handelsblatt.com

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