Merkel told a rally organized by her Christian Democratic Union party in the western city of Dortmund that unemployment has dropped to a post-reunification low since she first was elected chancellor in 2005.
She told the crowd she hoped to achieve full employment a rate below 3 percent by 2025. The rate hit as high as 12.6 percent in early 2005 and was most recently at 5.6 per cent in July.
"On one hand, Germany stacks up well, but on the other hand we live in a time of change, a time of uncertainty," she said.
Singling out the damage done to the "Made in Germany" label with Volkswagen's diesel cheating scandal, Merkel said honesty in business was a prerequisite going forward.
"The way things were swept under the rug or where loopholes in emissions tests were massively exploited to the point they were unrecognisable, that destroys trust," she told the crowd.
Merkel emphasised the need for the auto industry to develop cleaner technologies, but also sought to allay widespread fears that older diesel cars could be banned from the streets. A "transition phase" would be better than a ban, she said.
The government could help provide the infrastructure to support vehicles run by alternative power sources, but innovation was up to the automakers, she said.
"The question of whether the German automobile industry has recognized these signs of the times will decide their future, and with it hundreds of thousands of jobs," she said.
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