What do Michigan and Germany have in common? Unemployment. Michigan, at 7.5%, has the highest unemployment rate of any state in the U.S. Germany, at 12%, has the highest unemployment rate of any major industrial country in the world. In Michigan, the problem is sclerotic corporate health-care, pension, and wage policies that are hugely expensive. In Germany, where the government controls these policies, the problem is national. Yet the result is the same: Manufacturers are increasingly uncompetitive in the global economy. People who still have jobs and those who are retired are doing quite well, but at the expense of their children and others who can't get jobs because companies find the cost of hiring prohibitive.
The obvious solution is to make health care, pensions, and wages more flexible and less generous -- to give companies more incentive to hire. In Germany, political pressures have slowed moves to reform. In Michigan, unions have stopped companies, particularly Detroit auto makers, from taking the necessary steps. It may take bankruptcy to allow one or more of them to do what they need to do. General Motors Corp. (GM) is just one step removed from junk-bond status as a result of a recent credit downgrading.
But the burden of health care and pensions is only one reason for high unemployment rates. Detroit's corporate managers bear some of the blame. As gas prices surge well above $2 a gallon, the product mix isn't right. Wedded to gas-guzzling trucks and SUVs, the U.S. is way behind Japan in selling cars with hybrid engines. And while DaimlerChrysler has come out recently with beautifully designed cars, consumers have found GM and Ford models lacking.
Germany's high unemployment problem is more clearly a political problem of an aging population trying to maintain its prosperity in the face of intense global economic competition. Germany is not about to go into bankruptcy, as a private company might, but at some point unemployment will rise high enough to trigger an equivalent political crisis.
The rise of Asia and Eastern Europe as inexpensive manufacturing centers is changing the nature of international competition. Sadly, it looks as though it will take a corporate financial crisis in the state of Michigan and a political crisis in Germany to force the kind of policy changes that can ultimately lead to a drop in their high unemployment rates.