The labor market flexibility in the US service sector is truly remarkable. During recessions and booms, you can feel the changes in quality and number of waitresses in restaurants, in the size of staffs in shops, in the availability of cleaning services. In the roaring 1990's, it was almost impossible to find qualified restaurant staff to fill vacant jobs. During the stagnant economic years of the Bush administration, such workers were plentiful. In Europe, you simply certainly can't see these differences: waiters, busboys, and cooks all have job security.
[Hans-Werner] Sinn shows that the combined effects of the German tax and social welfare system virtually guarantee that no breadwinner in a family with two children can end up with less than €1,500 a month, even without working at all. This rate is well above, for example, the wage of unskilled labor in the iron and steel industry. In effect, Germany is telling its unskilled not to bother working.
The effects of the social welfare system are especially striking in Eastern Germany, where benefits are at Western German levels, despite lagging far behind in economic development. Sinn estimates that an East German family on welfare can collect four times the average income of a family in Poland and six times the income of a family in Hungary. With such a hurdle to hiring workers, no wonder industry is reluctant to locate in the East and the region is supported by subsidies equal to 45% of its gross product.
For Discussion. What sorts of reforms would be politically acceptable and help solve the incentive problem?