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The Berlin economy and labor market: can the city transform from startup hotbed to burgeoning metropolis?

Press Release of July 25, 2016

DIW Berlin’s experts identified the city’s untapped potential and formed recommendations based on a comprehensive study of its labor market, startup culture, and public investment patterns. The result: good potential, but productivity is low and innovation is weak. Overall, Berlin needs more fast-growing companies.

Has Berlin turned a corner? After a long period of stagnation, the city is on a stable growth path. Economic performance, employment, and population are growing at above-average rates for the first time in years, and unemployment is gradually decreasing. Nevertheless, the unemployment rate is still above the national average, and Berlin is stagnating when it comes to productivity and corresponding income levels.

“Berlin is the only capital in Europe whose productivity and per-capita income falls below the national average,” explains Marcel Fratzscher, President of the German Institute for Economic Research (DIW Berlin). “In recent years, Berlin has awakened from its slumber. There could be many prosperous decades up ahead – but policy needs to be more strongly oriented to making better use of the city’s enormous potential.”

A number of measures are needed for this transformation, emphasizes Martin Gornig, a DIW Berlin specialist in regional economy: “Among other things, we need to improve the growth conditions for young companies, strengthen the potential labor force’s share of workers with intermediate qualifications, and above all, implement the planned infrastructure expansions.”

These and further recommendations for action are derived from multiple new DIW Berlin studies on Berlin’s economy that focus on the labor market, startups, and public investment.

Despite employment growth, unemployment remains high

In the past decade, the number of employed persons in Berlin increased by roughly 290,000, which corresponds to a growth rate that exceeds that of Germany on the whole. The vast majority of these new employees are social security-obligated workers. Although Berlin’s unemployment rate has fallen from 19 to just under ten percent, it remains well above the national average. According to the new report by DIW Berlin labor market expert Karl Brenke, occupations requiring intermediate qualifications have become more prevalent, while unemployment is cropping up more and more among low-skilled workers.

The strong employment growth, however, was accompanied by a very weak development in productivity. The economic performance of Berlin’s labor force is roughly five percent below the national average, which is likely one of the reasons that Berlin continues to lag when it comes to wage levels.

“The weak productivity growth is an indicator of inadequate innovation in many if not all sectors,” explains Brenke. “This weakness prevents Berlin from achieving the economic power and higher incomes that would befit a national capital.”

Overall, Berlin’s labor force is highly skilled compare to that of other states. However, there is also a high share of low-skilled workers and high school dropouts, as well as a critical lack of training opportunities. Such weaknesses could be addressed through an education alliance for which businesses would commit to creating sufficient apprenticeships in the very near future; the Senate, in turn, would realign general education priorities more toward performance and career as well as promptly eliminate the substantial education investment backlog.

Fast-growing companies are missing, despite startup boom

Roughly 16 percent of Berlin’s workers are self-employed –according to an analysis by DIW Berlin’s Alexander Kritikos.  This is far above the national average of just ten percent. At the same time, Berlin has an above average number of innovative start-ups, putting it on the same level as Hamburg and Munich.

What’s missing, Kritikos notes, are the gazelles: the fast-growing companies that increase both productivity and income levels. Because of its thriving startup environment, Berlin is in an excellent starting position. But although Berlin is already doing a lot to support new companies, young, fast-growing companies still need help with the transitions from their startup phase to the growth phase, including better framework conditions.

In addition, there needs to be active location marketing, which will help attract innovative startups, as well as complementary services.  These services include not just providing high-quality commercial and industrial properties but also improving business-related administrative procedures to make them faster and more service-oriented.

Berlin’s startups – especially those specializing in business-to-business products (B2B) – still face difficulty securing venture capital when they aim to grow. Targeted partnerships, like the one with High-Tech Gründerfonds, could help.

“Fast-growing companies especially value locations with rapid, streamlined, non-bureaucratic processes,” explains Kritikos. “In the future, the state of Berlin should do more to significantly improve the speed with which all business-related administrative processes are taken care of.”

For example, speeding up visa procedures and holding regular job fairs specifically focusing on the needs of fast growing firms would help firms recruit qualified personnel. Another step would be fostering the network between Berlin’s strong research-base, for instance with additional professors in the IT sector, and its startups and fast growing companies.

Investment backlog despite budget surpluses

The investment situation in Berlin is complex. On the one hand, as part of the fiscal consolidation, Berlin was investing far too little over the course of years; on the other, the budget surpluses that materialized in 2014 and 2015 – the first time the city had some financial leeway – were directed into the Sondervermögen Infrastruktur der Wachsenden Stadt (“special assets infrastructure of the growing city,” SIWA). Overall, Berlin and its public companies are still investing relatively little in infrastructure – just 807 euros per inhabitant in 2014 – while in Hamburg, this figure amounted to 1,220. This is further discussed in the new article by DIW Berlin experts Felix Arnold, Johannes Brinkmann, Maximilian Brill, and Ronny Freier.

Most urgent is the need for investment in schools, where the backlog in Berlin is almost three times as high as it is in other states. Berlin’s substantial population growth also necessitates the modernization and expansion of public transport, and negotiations with the initiative for the Fahrrad (bicycle) referendum could help develop a more sustainable transport concept. It is also crucial for Berlin to pay more attention to housing construction in order to relieve the tight housing market.

Local policy has already taken into account and addressed many of these fields of action, and moderate financial means are indeed available through SIWA. Yet DIW Berlin’s experts believe that the implementation is lacking in effiziency and speed.

“The administration needs to be reorganized. More staff is needed, and the reorganization of double budgeting could also help to better identify investment needs and carry them out consistently,” says Freier.

In addition, individual administrative areas could be restructured either as special assets or public companies with their own personnel and extensive intervention rights, respectively. The experiences from the Hamburg’s special asset program Schulimmobilien (“school real estate”) demonstrated the possibilities of such a model.