Insight: The dark side of Germany's jobs miracle By Sarah Marsh and Holger Hansen STRALSUND, Germany (Reuters) - Anja has been scrubbing floors and washing dishes for two euros an hour over the past six years. She is bewildered when she sees newspapers hailing Germany's "job miracle." "My company exploited me," says the 50-year-old, sitting in the kitchen of her small flat in the eastern German town of Stralsund. If I could find something else, I'd be long gone. Stralsund is an attractive seaside town but Anja, who preferred not to use her full name for fear of being fired, cannot afford the quaint cafes. Wage restraint and labor market reforms have pushed the jobless rate down to a 20-year low, and the German model is often cited as an example for European nations seeking to cut unemployment and become more competitive. But critics say the reforms that helped create jobs also broadened and entrenched the low-paid and temporary work sector, boosting wage inequality. Labor office data show the low wage sector grew three times as fast as other employment in the five years to 2010, explaining why the "job miracle" has not prompted Germans to spend much more than they have in the past. Pay in Germany, which has no nationwide minimum wage, can go well below one euro an hour, especially in the former communist east German states. "I've had some people earning as little as 55 cents per hour," said Peter Huefken, the head of Stralsund's job agency, the first of its kind to sue employers for paying too little. He is encouraging other agencies to follow suit. Data from the European Statistics Office suggests people in work in Germany are slightly less prone to poverty than their peers in the euro zone, but the risk has risen: 7.2 percent of workers were earning so little they were likely to experience poverty in 2010, versus 4.8 percent in 2005. It is still lower than the euro zone average of 8.2 percent. But the number of so-called "working poor" has grown faster in Germany than in the currency bloc as a whole. In response, as other European countries rush to deregulate, Germany is re-regulating. Angela Merkel's conservative government is trying to water down the effects of some labor reforms brought in by her Social Democrat (SPD) predecessor Gerhard Schroeder, a year-and-a-half before the next federal election, when she is expected to seek a third term. The contrast between Germany's record levels of employment and the dire jobs situation elsewhere in Europe is stark. Last year, the number of people in employment in Germany rose above the 41 million mark for the first time. The jobless rate has been falling steadily since 2005 and now stands at just 6.7 percent, compared to 23 percent in Spain and 18 percent in Greece. It has been a tough battle since German unemployment peaked after reunification in 1990. Many east German businesses floundered in a free market once the Berlin Wall fell, sending joblessness there soaring over 20 percent. Globalization put Germany's export-reliant economy under competitive pressure, forcing it to adjust quickly. By 2003, Germany was embarking on reforms hailed as the biggest change to the social welfare system since World War Two, even as many of its peers were moving in the opposite direction. While the French Socialists were introducing the 35-hour week and cranking up minimum wages, Germany's Social Democrats (SPD) were deregulating the labor market and raising pressure on the jobless to find work. Unions and employers agreed wage restraint in return for job security and growth. Flexible working practices and government-subsidized reduced working hours enabled employers to adjust to the economic cycle without hiring and firing. From 2005, joblessness started to fall and is nearing pre-reunification levels. Elsewhere in Europe, governments tackling high unemployment are playing catch-up, making labor reforms the number one priority. France's conservative President Nicolas Sarkozy has repeatedly cited Schroeder's "Agenda 2010" reforms as an example for his country over the past few months. Labor reforms being introduced in Spain and Portugal have also borrowed heavily from Germany. Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called "mini-jobs." The number of full-time workers on low wages - sometimes defined as less than two thirds of middle income - rose by 13.5 percent to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labour Office. Jobs at temporary work agencies reached a record high in 2011 of 910,000 -- triple the number from 2002 when Berlin started deregulating the temp sector. Economists say it was Schroeder's intention to bring about a rapid expansion of these sectors in order to get the poorly-qualified and long-term unemployed back into the workforce. In 2005, Schroeder's last year as chancellor, he boasted at the World Economic Forum in Davos: "We have built up one of the best low wage sectors in Europe." Seven years later, employers praise the reforms that led to the growth of mini-jobs and temping. "The unions' argument that (mini) jobs lead to working conditions becoming precarious in Germany is not valid," said Mario Ohoven, head of the main association of "Mittelstand" small and medium-sized firms. Ohoven said they were particularly popular with women and students trying to earn some extra cash, while Juergen Wuttke of the BDA employers' group said the reforms gave companies more flexibility and the ability to hire more people for low-skilled jobs with low productivity. Fritz Engelhardt, who runs a small three-star hotel in the south-western town of Pfullingen, says he employs two "mini-jobbers" to help out at the weekend and run small errands. "Many people in catering try to deal with peaks in work at the weekend or when they have special events by hiring mini-jobbers," Engelhardt said. With big chains, hotels can use workers from a sister company, but for small and medium-sized companies mini-jobs are crucial to their very existence. Even German corporate giants rely on these new forms of employment for greater flexibility. Adidas, the world's second largest maker of sports apparel, and supermarket chain Kaufland, part of the same group as discount chain Lidl, both use mini-jobs to fill in staffing gaps when business picks up. Data from the Organisation for Economic Co-operation and Development shows low-wage employment accounts for 20 percent of full-time jobs in Germany compared to 8.0 percent in Italy and 13.5 percent in Greece. Critics say Germany's reforms came at a high price as they firmly entrenched the low-wage sector and depressed wages, leading to a two-tier labor market. New categories of low-income, government-subsidized jobs - a concept being considered in Spain - have proven especially problematic. Some economists say they have backfired. They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere. Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts. One out of five jobs is a now a "mini-job," earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups. "Regular full-time jobs are being split up into mini-jobs," said Holger Bonin of the Mannheim-based ZEW think tank. And there is little to stop employers paying "mini-jobbers" low hourly wages given they know the government will top them up and there is no legal minimum wage. Trade unions and employers in Germany traditionally opt for collective wage agreements, arguing that a legal minimum wage could kill jobs, but these agreements only cover slightly more than half the population and can be circumvented. "A lot of my friends work as carpenters, but companies describe them as janitors in their contracts to avoid paying the salary negotiated in the collective wage agreement," said one 33-year-old unemployed man in Stralsund who declined to give his name. The deregulation of temporary agency work has also given employers less incentive to hire workers on staff contracts with job protection and decent pay. Temporary workers are often paid less than staff in Germany. Low wages for mini-jobbers and increased pressure on the unemployed to get a job have had a deflationary impact on salaries across the board, some economists say. While wage inequality used to be as low in Germany as in the Nordic countries, it has risen sharply over the past decade. Low wage workers earn less relative to the median in Germany than in all other OECD states except South Korea and the United States. "The poor have clearly lost out to the middle class, more so in Germany than in other countries," said OECD economist Isabell Koske. Depressed wages and job insecurity have also kept a lid on domestic demand, the Achilles heel of the export-dependent German economy, much to the exasperation of its neighbors. "Import demand is low, even though Germany is one of the top performers in the euro area and could contribute more to a stronger performance of its partner countries," said Ekkehard Ernst of the International Labour Organization (ILO). With the 2013 elections looming and European neighbors complaining of trade imbalances, Germany's leaders have brought the issue of low wages back onto the agenda. Chancellor Merkel plans to introduce a minimum wage for the sectors which do not already have one and Labour Minister Ursula von der Leyen is campaigning for temp workers to get paid as much as staff. "The fact that we have a conservative government that is discussing the establishment of a minimum wage - that says something," said Enzo Weber of Germany's Institute for Employment Research (IAB). Whatever government comes next, measures to make the workforce more flexible will not pick up at the same pace. We've reached a critical mass and I think it won't go much further. ILO's Ernst says Germany can only hope that other European countries do not emulate its own wage deflationary policies too closely, as demand will dry up: "If everyone is doing same thing, there won't be anyone left to export to." Additional Reporting by Brian Rohan and Victoria Bryan; Editing by Stephen Brown, Annika Breidthardt, John Stonestreet and Noah Barkin/Janet McBride