Impulses for Growth and Employment through Profitable Savings in ...

Impulses for Growth
and Employment through
Profitable Savings
in Material Resources
Aachen Foundation
Schmiedstraße 3
D-52062 Aachen
Tel +49 241 409 29 0
info@aachener-stiftung.de
Commissioned by
Authors
Dr. Janina Scheelhaase Dr. Karl Lichtblau
Senior Manager Macro Economics Director
Prognos AG Institut der deutschen Wirtschaft Köln
Consult GmbH
Prof. Dr. Bernd Meyer Dr. Hartmut Fischer
Director Senior Manager
Gesellschaft für wirtschaftliche Arthur D. Little GmbH
Strukturforschung GmbH
Translation Michael Schatzschneider

Hartmut Fischer, Karl Lichtblau, Bernd Meyer, Janina Scheelhaase
Impulses for Growth and Employment through
Profitable Savings in Material Resources
Industry is continually making an effort to reduce both material costs of products and
material input of production. What kind of effects on the national economy can be
expected from material savings that are profitable on a single-company basis? What
are the conditions under which new jobs develop?
Material savings on a single-company basis
(dematerialization) beyond the presentday
trend has strong positive effects on
the national economy. It strengthens Germany’s
competitive position, provides
growth, contributes to the consolidation of
public budgets and increases real income
of private households. As is the case in
any kind of productivity increase, labour
market effects of a profitable dematerialization
are also dependent upon concomitant
wage developments.
Unused Single-Company Potentials
Because of the high importance of material
throughput costs industry continuously
reduces material throughput by increasing
material efficiency of production and products.
Per Euro of gross national product,
material input fell by an inflation-adjusted
42% between 1960 and 1990 1 . This trend
toward “profitable dematerialization” of
industrial value added remains intact and
is also evidenced by the 2002 Innovation
Prize of the German Economy: the awardwinning
products were convincing essentially
through their reduced material
throughput costs in the product life cycle 2 .
This paper evolved from an assignment by the
Aachen Foundation Kathy Beys to the authors for
the purpose of carrying the issue of dematerialization
into professional circles and into the political
arena.
1 Hinterberger, F., S. Renn, H. Schütz, Arbeit, Wirtschaft,
Umwelt, Wuppertal Paper No. 89, Wuppertal,
1999, p. 12
2 Manager Magazin, Spezial Innovationspreis, 16
January 2003, pp. 64-83. MTU Aero developed an
aeroplane turbine with reduced energy consumption,
Leica Microsystems extended the useful economic
life of expensive optics used in chip production
quality assurance, Solvent Innovation devel-
Nevertheless, a distinctly greater harvesting
of potentials by industry is possible.
Using only two instruments, for instance,
the consultancy company Arthur D. Little
GmbH regularly reduces the material
throughput costs of companies by a total
of 20%:
• Using “Zero Loss Management” material
and energy losses in the supply
chain are reduced through improved
cost transparency, task development
by interdisciplinary teams and structured
creativity techniques. Material
exploitation was improved at three
European ice-cream factories of a
large food company, for example, by
adjusting process parameters,
strengthening pre-emptive maintenance
and selective machine investments.
With Zero Loss Management
manufacturing costs are regularly reduced
by 5%.
• Using “Design to Cost”, functions, costbenefit
profiles and design of products
are redrafted in collusion between
product development, buying department,
production, customers and suppliers.
Life cycle costs of equipment
were reduced at a company producing
chemical equipment, for example, by a
more intelligent and material-saving
construction of equipment components
as well as increased energy efficiency
during equipment operation. With Design
to Cost, life cycle costs regularly
contribute to a reduction of
manufacturing costs by 15%.
Experience shows that these annual savings
are achieved with a one-time invest-
oped ionic fluids that serve to notably increase material
utilisation in the chemical industry.
1

ment with an average payback of twelve
months. About a third of the one-time investment
consists of internal and external
personnel costs for task development and
implementation, the other two-thirds consist
of equipment expenditures.
Other management consultancies have
similar experiences with comparable
methods. Specific engineering methods
and technologies herald further potentials 3 .
Barriers
With such a potential the question arises:
Why isn’t it already being harvested to the
greatest possible extent by individual
companies within a market economy?
General practice shows that “nobody is
perfect”, not even industry. No company
exists that is and stays fully rationalised.
Today, by no means all motivation and
performance potentials with respect to
personnel have been tapped. Major optimisation
surges of the past (quality management,
logistics optimisation, outsourcing,
business process engineering) could
for the most part have been implemented
years earlier. But a critical mass of awareness,
methods and qualified multipliers
was necessary for the potentials to be
tapped on a large scale.
Having said this it is not quite as astonishing
that potentials for profitable dematerialization
have not yet been fully tapped.
Everyday business practice shows a series
of concrete structural barriers standing
in the way of profitable dematerialization:
• Business decision-makers are often
not aware of the full costs that accrue
with respect to manufacturing in terms
of material losses 4 and with respect to
product use in terms of material consumption.
This is one reason that
common accounting systems either do
not display or incompletely display
these costs.
3 Cf. for example Fachverband Elektrische Antriebe
im Zentralverband Elektrotechnik- und Elektronikindustrie
(ZVEI) e.V. (ed.), Energiesparen mit elektrischen
Antrieben – Einsparpotenziale in Milliardenhöhe,
Frankfurt 1999.
4 In particular for rejects, effluents and waste
• Cost reduction is most commonly associated
with the reduction of personnel
costs and less commonly with a
reduction of material throughput costs.
In many cases, this is the reason why
material costs are not reduced as consistently
as personnel costs. In individual
cases this goes as far as cutting
the budget for personnel so stringently
that insufficient capacities remain for
other cost reduction measures.
• Incentives for a company do not automatically
lead to equivalent incentives
for company decision-makers. Purchasing
departments, for instance, are
often controlled in accordance with unit
prices rather than the more indicative
life cycle costs of equipment and material
purchased. In this way, solutions
prevail on a supra-company basis that
are not always the most economical.
The German Electrical and Electronic
Manufacturers’ Association (ZVEI) estimates
that the introduction of appropriate
electric engines with the most
economical life cycle within German
industry would lead to billions of savings.
• Company personnel do not consistently
possess the know-how for tapping
the full potential for profitable dematerialization.
While the required
methods are not highly complex they
are demanding and do not yet belong
to the standard curriculum of university
and in-house training.
• Business access to know-how and
capital for implementing the potentials
via contracting or other risk-benefitsharing
schemes with third parties is
hampered by lacking modularization of
production systems as well as missing
practicable standards for respective
contracts and measuring procedures.
However, most of these barriers can be
removed by economic policy action in conjunction
with single-company measures.
By supporting respective media reports
the government can foster an awareness
for the extent of material throughput costs
and ways of influencing them. It can ac-
2

celerate the spread of best practice with
special support programmes. Moreover,
via its own procurement and by improving
consumer information with regard to life
cycle cost it can enhance market access
and the spread of profitable dematerialised
goods and services. And the government
can make sure that every university
graduate is in command of the ABC of
dematerialization in his or her profession.
The Question at Issue
If economic policy is to commit itself to
supporting profitable dematerialization
then a pre-quantification of attainable economic
results is expedient. To this end the
Aachen Foundation Kathy Beys – whose
focus of work is dematerialization – has
commissioned a study whose results are
presented in this paper.
The question at issue of this study is:
What effects upon private sector turnover,
employment and public budgets arise if
the observable single-company efficiency
reserves of profitable dematerialization are
widely implemented in the national economy?
Scientific appraisals of the macroeconomic
effects of profitable dematerialization are
not yet available in Germany as far as the
authors are aware.
With regard to the similar processes of
single-company cost-neutral dematerialization
as well as profitable reduction of
cost factors other than material throughput
selected existing appraisals are summarised
below.
Appraisals of Single-Company Cost-
Neutral Dematerialization
In a study commissioned by Greenpeace,
the Prognos AG 5 examined the effects on
employment and growth of a singlecompany
cost-neutral dematerialization
through a shift of goods and services from
material-intensive to less materialintensive
forms of production or sectors.
5 Prognos AG, Mehr Arbeitsplätze durch ökologisches
Wirtschaften? Eine Untersuchung für
Deutschland, die Schweiz und Österreich, Gutachten
im Auftrag von Greenpeace, Hamburg 1999.
For instance, a shift of agricultural production
from conventional to biological farming
and a shift of transport from private to public
transport was modelled. The effects for
the year 2020 in Germany, Switzerland
and Austria were assessed using a combined
bottom-up and input-output model.
In sum, a reduction of material input by
25% as well as of non-renewable energy
sources by 30% in 2020 against the baseline
of 1990 led to slightly positive employment
effects in all three national
economies studied. For Germany the net
employment effect was over 160,000 new
jobs. Modelling came up with a neutral
effect on the gross domestic product
(GDP) of all three countries.
Meyer and Lutz 6 analysed the effects of
the increased input quota observable between
1980 and 1990 in so-called “other
market-determined services”, a heterogeneous
group in which, amongst others,
consultancy companies, engineering companies,
advertising agencies and cleaning
companies are merged. The effects are
determined by a comparison of actual developments
with simulated scenarios in a
complex econometric Pantha Rhei model
that consists of about 50,000 equations, is
deeply disaggregated by sector and
whose parameters have been estimated
econometrically on the basis of developments
between 1978 and 1994. One of
these scenarios describes de facto the
increase of material input by 10% with a
concomitant identical input reduction value
in “other market-determined services”.
This cost-neutral deterioration of material
efficiency reduces GDP in the 1980-1990
time span by 2.3% and the wage bill by
2.4% with a slight increase in employment
growth (0.2%).
These results suggest single-company
cost-neutral dematerialization can achieve
clearly positive effects upon GDP and the
wage bill while only slightly positive or
negative employment effects. Similar re-
6 Meyer, B. and C. Lutz, Ökoeffiziente Dienstleistungen
und Materialverbrauch. Eine Simulationsstudie
mit dem disaggregierten Modell PHANTA RHEI,
in Hinterhuber, F. and H. Schnabl (eds.), Arbeit –
Umwelt – Wachstum. Nachhaltigkeitsaspekte des
sektoralen Strukturwandels, Norderstedt 2002, pp.
190-228.
3

sults are on hand with respect to appraisals
of the national economic effects of
programmes designed to increase energy
efficiency 7 .
Appraisals of Profitable Productivity
Increases in Single-Companies
Material savings can be interpreted as a
kind of cost reduction that leads to increased
productivity. A dematerialization
of the economy has similar effects on employment
as productivity increases. An
increase in productivity 8 in turn is led primarily
by product and process innovation.
An abundance of empirical literature is
available on this topic 9 . There are three
main conclusions.
• Many analyses 10 for Germany come to
the conclusion that process innovation
leads to employment losses. While
7 Cf. for example Bach, S. and C. Bork, M. Kohlhaas,
C. Lutz, B. Meyer, B. Preatorius, H. Welsch,
Die ökologische Steuerreform in Deutschland. Eine
modellgestützte Analyse ihrer Wirkungen auf Wirtschaft
und Umwelt, Berlin 2001; Barker, T., Achieving
a 10 per cent cut in Europe’s CO2 emissions
using aditional excise duties: multilateral versus
unilateral action E3ME, E3ME Working Paper No.
29, Vienna 1998; Böhringer, C., and H. Welsch, A.
Löschel, Environmental Taxation and Structural
Change in an Open Economy – A CGE Analysis
with Imperfect Competition and Free Entry, ZEW
Discussion Paper No. 01-07, Mannheim2001;
RWI/Ifo (eds.), Gesamtwirtschaftliche Beurteilung
von CO2-Minderungsstrategien, Untersuchungen
des Rheinisch-Westfälischen Instituts für Wirtschaftsforschung,
Issue 19, Essen 1996.
8 The OECD provides a good overview in: Organisation
for Economic Co-operation and Development
(OECD) (ed.), The Sources of Economic Growth in
OECD Countries, Paris 2003.
9 For a broad overview see: Lehner, F. and M.
Baethge, J. Kühl, F. Stille (eds.), Beschäftigung
durch Innovation, Munich 1998. Or for a shorter
compilation see: Beeker, D., Technischer Fortschritt
und Beschäftigung, Institut der deutschen Wirtschaft
Köln, Beiträge zur Wirtschafts- und Sozialpolitik, No.
264, Cologne 2001.
10 Rottmann, H. and M. Ruschinski, The Labour
Demand and the Innovation Behaviour of Firms,
Jahrbücher für Nationalökonomie und Statistik,
Volume 217 (1998), pp. 741-752; or: Blechinger, D.
and F. Pfeiffer, Qualifikation, Beschäftigung und
technischer Fortschritt, Jahrbücher für Nationalökonomie
und Statistik, Volume 218 (1999), pp. 128-
146; also: Flaig, G. and H. Rottmann, Faktorpreise,
technischer Fortschritt und Beschäftigung, Eine
empirische Analyse für das westdeutsche verarbeitende
Gewerbe, ifo-Diskussionsbeitrag No. 59,
Munich 1998.
Bellmann/Kohaut 11 do not come to
clear conclusions, other studies 12 show
a positive correlation. A more detailed
comparison of analyses shows that a
positive influence of process innovations
on employment is more likely to
occur if many secondary compensatory
effects (price reductions, quality
improvements, investment growth,
wage reductions etc.) are considered.
This is a very plausible finding. On the
single-company level rationalisation
measures lead to employment losses,
at least in the short term. Viewed from
a national economic and medium term
perspective a different picture emerges
because released personnel can again
find productive employment.
• The situation with respect to product
innovation is different. Here, most
studies show a positive correlation between
innovation, i.e. productivity increases,
and employment.
The INFORGE Model
The national economic effects of dematerialization
are so complex that they can
only be meaningfully captured and empirically
measured using a model. For that
purpose the INFORGE (INterindustry
FORcasting GErmany) model is used.
INFORGE is a profoundly structured sectoral
forecasting and simulation model that
has been updated annually since 1996
and used in many applications 13 . The ver-
11 Bellmann, L. and S. Kohaut, Betriebliche Beschäftigungsentwicklung
und Innovationsaktivitäten, in:
Mitteilungen IAB, Volume 32 (1999), pp. 416-422.
12 Almus, M. and E. Nehrlinger, Beschäftigungsdynamik
in jungen innovativen Unternehmen: Empirische
Ergebnisse für West-Deutschland, Diskussionspapier
No. 98-09, Zentrum für Europäische
Wirtschaftsforschung, Mannheim 1998; or Smolny,
W. and T. Schneeweis, Innovation, Wachstum und
Beschäftigung, Eine empirische Untersuchung auf
der Basis des ifo-Unternehmenspanels Center for
International Labour Economics, Forschungsschwerpunkt
„Internationale Arbeitsmarktforschung“,
Fakultät für Wirtschaftswissenschaften und Statistik,
Discussion Paper 33-1996, Konstanz.
13 Cf. for example: Lichtblau, K. and B. Meyer, G.
Ewerhart, Komplementäres Beziehungsgeflecht
zwischen Industrie und Dienstleistungen, in: iwtrends,
4/96, pp. 1-24; or: Elixmann, D. and A. Keuter,
B. Meyer, Sectoral Employment Effects of the
Evolution of the German Telecommunications Mar-
4

sion used in this paper is based on the
German Federal Agency for Statistic’s new
NACE classification of national accounting.
INFORGE is the economic part of the
Panta Rhei model that has proved itself as
an instrument for the analysis of environmental-economic
relationships 14 .
The INFORGE model’s strong performance
potential is based on the INFORUM
philosophy 15 that is characterised by the
bottom-up and complete integration construction
principles. The bottom-up construction
principle says that each of the 59
sectors of the national economy is modelled
in great detail and that the national
economic variables are formulated through
explicit aggregation within the model. The
construction principle complete integration
consists of a complex and simultaneous
modelling that depicts inter-industrial linkages
as well as the development and distribution
of income, the government’s redistribution
actions and income use by
private households for various goods and
services.
ket, 1996-2005, in: Communication Strategies, No.
28, 4th Quarter 1997, pp. 105-127; or: Meyer, B.
and G. Ewerhart, Lohnsatz, Produktivität und Beschäftigung.
Ergebnisse einer Simulationsstudie mit
dem disaggregierten ökonometrischen Modell
INFORGE, in: Schnabl, H. (ed.), Innovation und
Arbeit: Fakten – Analysen – Perspektiven, Tübingen
1997, pp. 253-267; or: Meyer, B. and G. Ewerhart,
T. Siebe, Strukturwandel, Arbeitsplätze und dienstleistungen.
Analyse des sektoralen Strukturwandels
in der Beschäftigung des IHK-Bezirks Münster für
die Jahre 1978 bis 1996 und Prognose bis zum Jahr
2000, Expertise commissioned by the Münster
Chamber of Trade and Commerce, 1998; or: Meyer,
B. and G. Ewerhart, T. Siebe, Tertiarisierung ohne
wettbewerbsfähige Industriebasis?, in: Raumforschung
und Raumordnung, No. 5/6-99; or: Meyer,
B. and G. Ahlert, Die ökonomischen Perspektiven
des Sports. Eine empirische Analyse für die Bundesrepublik
Deutschland, Schriftenreihe des Bundesinstituts
für Sportwissenschaft, Volume 100,
Schorndorf 2000; or: Lutz, C. and B. Meyer, P.
Schnur, G. Zika, Projektion des Arbeitskräftebedarfs
bis 2015. Modellrechnungen auf Basis des
IAB/INFORGE-Modells, in: Mitteilungen aus der
Arbeitsmarkt- und Berufsforschung (MittIAB),
3/2002, pp. 305-326.
14 Frohn, J. and P. Chen, B. Hillebrand, W. Lemke,
C. Lutz, B. Meyer, M. Pullen, Wirkungen umweltpolitischer
Maßnahmen. Abschätzungen mit zwei ökonometrischen
Modellen, Heidelberg 2003.
15 Almon, C., The INFORUM-approach to Interindustry
Modelling, in: Economic Systems Research
3, 1991, pp. 1-7.
The disaggregated structure of the
INFORGE model is reflected in an enormous
but consistent information processing:
The nearly 40,000 model equations
are embedded in the fully endogenised
account system of national economic accounting.
The model is characterised by a
very high degree of endogenisation. Exogenously
specified are primarily only a few
tax rates, labour supply and the global
market variables of the international
GLODYM system that is an enhancement
of the global COMPASS model 16 .
INFORGE is an econometric input-output
model that can be described as an evolutionary
model 17 . The behavioural equations
model decision-making routines that
are not explicitly interpreted from the optimisation
behaviour of agents but are
based on limited rationality. Prices are
explained in terms of monopolised pricesetting
behaviour. The model describes
time as historical and irreversible. Capital
adjustment generates path independence.
The input-output approach is commonly
viewed as demand-oriented modelling.
However, this is not the case for
INFORGE. Even if it is true that demand
determines production in INFORGE, all
goods and factor demand variables depend
upon, amongst other things, relative
prices, whereby the prices themselves are
determined by companies’ unit costs in
terms of a price-setting hypothesis. In this
case, the difference vis-à-vis general balance
models, in which a competitive market
is modelled, is in the implicit market
form, not in the emphasis of one or the
other side of the market. In other words,
companies choose their sales price on the
basis of their cost situation and the prices
of competing imports. Demand reacts to
this with a decision that then determines
the amount of production. In this way,
supply and demand elements are equally
prevalent.
16 Meyer, B. and K. Uno, COMPASS – Ein globales
Energie-Wirtschafts-modell, in : ifo-Studien, No. 45,
1999, pp. 703-718. Meyer, B. and C. Lutz, Ökoeffiziente
Dienstleistungen…, l.c.
17 Meyer, B., Strukturanalyse, in: Herrmann-Pillath,
C. and M. Lehmann-Waffenschmidt (eds.), Handbuch
Evolutorische Ökonomie, Berlin 2003.
5

Besides the level of input-output computation
that is profoundly structured in 59 production
or economic sectors, the model for
the computation of the national economic
variables contains the account system of
the national economic accounts of the
Federal Republic of Germany. This system
contains all income redistribution including
social security and taxation between the
government, private households and business
and thus enables the computation of
available incomes which themselves are
important determinants of final demand.
Moreover, the financing balances of institutional
transactors are determined. This
means that governmental budget restrictions
are also included in the model. The
complete fiscal policy is therefore also
endogenously embedded in the system.
Monetary policy, in as much as it influences
interest levels, is also endogenous.
Scenarios Examined
The period 2004-2015 was chosen for the
appraisal as this is an appropriate time line
for a political programme that seeks to
change efficiency structures on a wide
scale in the economy at large. The effects
of profitable dematerialization are examined
by using the values achieved in 2015
on the basis of different scenarios and
comparing them to the zero variant (endogenous
extrapolation of the status quo
in the model):
• In Scenario I “Imperfect Markets” profitable
dematerialization takes place
within the environment of present-day
wage and price formation in Germany.
• In Scenario II “Wage Competition” it is
assumed – in variance to Scenario I –
that productivity gains through dematerialization
do not lead to higher wages
but instead correspond to those of the
base scenario.
• In Scenario III “Price Competition” we
assume – in variance to Scenario I –
that competitive pressure forces companies
to pass on nationally achieved
productivity gains to consumers in the
form of lower prices. Wage formation
corresponds to that in Scenario I.
Scenarios II and III do not confer with present-day
economic practice but point to
the numerous welfare gains that can be
achieved on the labour and product markets
on the basis of more complete competition.
Common Assumptions
Across all Scenarios
Simplified assumptions are necessary for
depicting the scenarios in INFORGE. In all
scenarios, profitable dematerialization is
depicted through a linear reduction of material
costs per unit of production in the
manufacturing sector and in public administration
by 20% across the study’s time
line. In several ways, this is a conservative
assumption:
• Company practice shows double as
much potential (20% of manufacturing
costs instead of 20% of material
costs).
• The scenarios limit the cost effects to
production in the manufacturing sector
and in public administration. This
means that the economic sectors with
the highest dematerialization potentials
are addressed but that a political programme
aimed at profitable
dematerialization will have effects on
other sectors too through respectively
optimised products and know-how
• transfer. The development of new products is
not explicitly taken into account in the
scenarios. In reality, however, a strong
surge toward the dematerialization of
production and product use will not
only reduce costs but also create new
products. Cellular phones are a case in
point which only became a mass market
after miniaturisation with concomitant
cost reductions and easier usability
occurred.
As such efficiency gains do not simply fall
from the heavens but require innovation
and investment by companies annual savings
need to be juxtaposed with one-time
expenditures 33% of which consist of demand
for services close to the company
and 66% of which consist of fixed investment.
With respect to material cost reduction
(50% of total industrial costs) this onetime
expenditure amounts to a simple annual
saving while with respect to energy
cost reduction (2% of industrial costs) it
6

amounts to a sixfold annual saving. These
figures are based on consultancy experience
as well as empirical research 18 .
Description and
Interpretation of Results
Initially, dematerialization has two direct
effects. For one, it reduces costs in manufacturing
industry and in public administration.
For another, it reduces turnover of
material suppliers who are in turn mainly
located in the manufacturing sector. So
there will be winners and losers of dematerialization.
Cost reductions have numerous indirect
effects whose most important correlations
are depicted schematically in figure 1. Initially,
cost reduction has the effect of reducing
prices. If price reductions are lower
than cost reductions, which is usually the
case, business profits will increase. This
leads to increased fiscal income on the
part of the government and higher private
household income. Both effects increase
demand for goods and services and therefore
turnover, production and employment.
On a purely calculative basis a growth of
company profit means that companies’
added value per employee increases, socalled
labour productivity. Together with
price development, this is an equally important
determinant for wages. The price
reduction effected by dematerialization
squeezes down wages, whereas the
growth in labour productivity expands
wages. As productivity increase – as will
be shown below – is stronger than price
decline we have an on balance wage increase.
The effects on employment cannot be
clearly defined. The production growth
depicted above increases employment. On
the other hand we have just established
that wage rates increase. If we include the
general decline of prices we have a clear
growth of real wages with negative effects
upon employment. Then, we will also have
tangential effects on income.
18 Cf. for example Prognos AG, Klimaschutz und
Arbeitsplätze – sind klimaschützende Maßnahmen
ein sinnvoller Beitrag zur Arbeitsmarktpolitik?,
Frankfurt 2001.
Interpretation of Scenario I
(Imperfect Markets)
The results correlate with theoretical considerations
as they have just been discussed
above (see figure 1). Productivity
gains induce GDP growth including usage
components (see table 1). Real GDP in
2015 is 10.5% above the respective figure
in the base-line forecast. This correlates to
absolute changes in 2015 vis-à-vis the
base-line forecast for the:
• Economy. Turnover is EUR 152.4 billion
higher in stable prices, net company
profit grows in respective prices
by EUR 172.9 billion.
• Employees: Wage bills are nominally
higher at EUR 74.6 billion.
• Public sector budgets: We have a relief
of about EUR 1.3 billion.
Consumption, investments and exports
also show increases. Imports are slightly
reduced due to a decline in specific advance
input demand and an improved
competitive position of German companies
despite GDP growth.
In sum, these results show that profitable
dematerialization corresponds to welfare
increases in the form of a higher social
product and an even higher growth of real
7

private consumption. If we subtract consumer
goods prices (1.8%) from the relative
change in the wage rate (6.5%) we get
an increase in the real wage rate that is
8.3% higher than the base-line forecast:
An hourly wage can then purchase 8.2%
more consumer goods. An increase in
material efficiency apparently makes the
national economy wealthier.
Table 1
Effects of Dematerialization as Devia-
tions to the Base-Line Forecast in 2015
Variable Scenario I
“Perfect
Markets”
Consumer
goods prices
Producer
costs
Labour
productivity
in stable
prices
Production
value
Gross domestic
product
Private
consumption
State consumption
Capital
investment
Construction
investment
Scenario II
“Wage
Competition”
Scenario
III
“Price
Competition”
relative deviation in per cent
-1.87 -3,25 -7.17
-1.29 -2.55 -7.49
6.52 0.29 4.00
3.30 2.38 6.41
10.48 9.37 13.83
13.36 10.96 15.44
5.98 5.20 11.41
3.71 3.33 5.95
3.25 2.87 4.44
Exports 0.69 0.71 2.20
Imports -2.07 -3.16 -2.50
in respective
prices
State financial
balance
absolute deviations in Euro (billions)
1.28 21.24 -5.72
in persons absolute deviations in persons
Employees
(rounded to
10,000)
-480,000 760,000 -300,000
The government profits from dematerialization
in two ways. For one, it is a direct
beneficiary because costs in public administration
fall by nearly EUR 3 billion
annually through a reduction in material
costs. For another, it profits from general
economic development. However, increasing
fiscal income is counteracted by higher
social costs through lower employment so
that the financial balance of the government
improves only relatively marginally at
EUR 1.3 billion.
Several important results of Scenario I
require further interpretation:
• Despite the acceleration of economic
growth the number of gainfully employed
persons is about 480.000 lower
in 2015 than in the base-line forecast.
• In Scenario I the production costs for
German companies in the manufacturing
sector fall by about 10%. Consumer
goods prices – which encompass
products of the manufacturing
and services sectors – decline by only
1.8%. This discrepancy cannot only be
attributed to the fact that dematerialization
in the simulation model is limited
to the manufacturing sector. Rather, it
is also attributed to market imperfections.
How can employment fall despite the
stated general economic upturn? First of
all we should not forget that – as elaborated
above – one direct effect of dematerialization
on employment is negative.
Namely, that producers of material are
afflicted by a drop in turnover and employment.
Even if other companies do enjoy
cost reductions as well as profit from
an increased demand for goods, which
has positive effects for employment, this is
counteracted by the wage increases induced
by productivity growth as described
above. This effect corresponds to the
wage formulation that is a reality of the
German labour market. Moreover, these
findings are in alignment with findings presented
in the literature outlined above,
namely that process innovation tends to
lead to employment losses.
Results of Scenario II
However, it is also possible to envision a
wage formulation that takes place in the
framework of a societal consensus independently
of the productivity growth induced
by dematerialization. Wage increases
then correspond to those depicted
in the base-line scenario. All other assumptions
remain unchanged.
8

Table 1 shows that the effects on GDP are
only slightly different to those in Scenario
I. However, this scenario has a much better
labour market effect of about 760,000
additional jobs because the negative effect
on employment due to wage increases is
inapplicable.
Further results of Scenario II in 2015 in
comparison to the base-line scenario are:
• Economy: Real production value grows
by 2.4% or EUR 110.0 billion, net
company profits grow nominally by
EUR 163.6 billion.
• Employees: The wage bill grows nominally
by merely EUR 22.3 billion. However,
prices fall more than in Scenario I
with the effect of a real improvement of
the position of employees:
With practically unchanged nominal
wages real wages increase through a
3% decline in consumer prices while
employment increases by about
756,000 persons.
• Public sector budgets: Relief at a
nominal EUR 21.2 billion is now considerably
higher than in Scenario I because
social costs are now much lower
due to the employment situation.
Of course, employment effects do not take
place to the same degree across all sectors,
as figure 2 shows. Definite winners
can be found in all service sectors. Besides
trade and services close to companies,
the health sector, education, culture,
sports and entertainment as well home
services benefit particularly. These sectors
profit from an increased demand emanat-
ing from higher incomes induced by dematerialization.
Results of Scenario III
In Scenario III productivity growth minus
the counteracting wage development is
passed on fully to consumers in form of
price reductions. With respect to wage
formulation we assume the same behaviour
as in Scenario I. This means that the
wage rate is endogenous.
The benefit for business, employees and
the government is initially in a clear improvement
of purchasing power vis-à-vis
Scenario I and II because of a price reduction
of 7.2%. The expansive effect on GDP
is the strongest of all scenarios. In comparison
to the base-line scenario the following
effects are anticipated for 2015:
• Economy: Production value increases
in real terms by 6.4% or EUR 195.5 billion,
net company profit increases
nominally by EUR 115.0 billion.
• Employee wages: The wage bill increases
by a nominal EUR 38.6 billion,
purchasing power per working hour increases
by 11.2% concomitant with a
7.2% decrease in consumer goods
prices and a 4.0% increase in nominal
wage rates. However, employment
drops by about 300,000 persons due
to the strong growth in real wages.
Employment losses are much lower
than in Scenario I because of the
stronger general economic upturn.
• Public sector budgets: In comparison
to Scenario II the state budget is burdened
by higher social costs so that
the effect on the financial balance of
the state at EUR -5.7% billion is
slightly negative.
This means that stronger price competition
in the national market also increases the
benefits of a profitable dematerialization
and other productivity gains for businesses,
the state and employees as well
as providing a limited number of new jobs.
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Summary of Results
Computations with the econometric
INFORGE model have shown that a profitable
increase of material efficiency on a
single-company basis leads to overall productivity
increases and price reductions in
the national economy which foster economic
growth and have positive effects on
real income for businesses and private
households. Due to imperfect goods’ markets
these price reductions are lower than
the productivity gains.
If wage rates increase in accordance with
this productivity growth a decline in employment
would occur despite the real increase
in GDP. But if wage rates follow
the paths they would have taken without
dematerialization then we would witness
clear employment growth.
Closely linked thereto are the effects on
the state budget. Depending on how the
wage rate reacts there are negative or
positive effects upon the financial balance
of the social security system that clearly
outweigh the direct effects of profitable
dematerialization on public sector spending.
The effects of the profitable increase of
material efficiency modelled here on the
labour market and the financial balance of
the state therefore depend on the concrete
design of dematerialization and flanking
labour-market measures.
10