Keeping Germany at work

The crisis has bitten deep, but unemployment in Germany has fallen. How?

Unlike some of its European neighbours where joblessness has soared, Germany’s unemployment rate actually declined by nearly a whole percentage point, from 7.9% at the start of the recession to 7% in May 2010. By contrast, unemployment for the OECD as a whole rose by 3 percentage points to 8.6%. Today, the German unemployment rate is well below the OECD average. To be sure, almost half of all jobseekers have been unemployed for more than a year in Germany, and structural unemployment is quite high by OECD standards. But the muted impact of the crisis on German jobs has raised interest among policymakers everywhere. And indeed, a close look shows that policies played a key role.

Take the large reductions in working time: these reductions were introduced to such an extent that average hours worked fell by 3.4%. Hourly labour productivity declined by 3.9%. The sheer size of adjustment in hours was made possible by several factors, including winding back the extensive use of overtime before the downturn and the sharp decline in demand in the exporting sector. The relatively strict employment protection regulations mixed with flexible work-time practices also played a role. The result was a form of “labour hoarding” in firms that largely spared the economy from an upsurge in unemployment.

Germany’s ability to keep a lid on unemployment owes much to the shorter work-time policy called Kurzarbeit. New OECD estimates indicate that by the third quarter of 2009 over 200,000 jobs may have been saved as a result of Kurzarbeit. These estimates are somewhat smaller than the full-time equivalent of participation in short-time work (350,000), suggesting that Kurzarbeit ended up supporting at least some jobs that would have been maintained even in the absence of the subsidy. Yet, compared to other types of labour market programmes short-time work schemes appear to be fairly cost-effective.

However, other institutional arrangements also played their part, as a recent study by the Federal Employment Agency in Germany (IAB) shows. In fact, the overall decline in total hours worked during the 2008-09 period came to 4%, of which just 0.3 percentage points was due to a lower employment level. The rest of the reduction reflects lower average hours for other reasons, including employer-initiated reductions in working time and reduced over-time. In fact, employer-initiated reductions in working time within existing collective agreements represent a larger source of flexibility in average hours than Kurzarbeit. These reductions appear to account for approximately 40% of the recent reduction in working time and were associated with proportional reductions in pay, at least for hourly workers.

One of the most influential models for these contract provisions was Volkswagen during a recession in the early 1990s, when it tied working-time reductions to lower pay to avoid redundancies. Since that time, it has become standard practice in Germany for collectively negotiated employment contracts to specify an hour’s band around the standard working week within which employers can vary working hours, while adjusting pay according to the standard hourly wage rate. This is intended to provide employers with room to adapt to temporary changes in demand and provide decent employment security at the same time. Even without Kurzarbeit, German employers would have achieved substantial reductions in average hours by cutting back on the volume of paid over-time work–this accounted for a fifth of the total reduction, according to the IAB study, and encouraging employees to use up any free time they were owed accounted for another fifth.

Less unemployment and holding on to workers’ skills is clearly a positive thing, but can lead to a build-up of unviable jobs. Such labour hoarding could in turn raise the risk of a jobless recovery. Indeed, German GDP could expand by more than 7% in real terms without any increase in employment, provided hours worked per employee and hourly productivity were to rise back to their pre-crisis levels. However, achieving GDP growth on this scale is expected to take several years. As a result, employers may come under increasing pressure to restore productivity more quickly by reducing the size of their workforces. Indeed, competitive pressures are looming, as indicated by recent declines in hourly labour productivity. On the other hand, the country’s powerful exporting industries that took the brunt of the global downturn may have built up sufficient capacity and resilience over the years to hold on to their workers for some time yet. Provided the global recovery gathers momentum, many of these retained jobs should become viable again, which will ease pressure on employers to adjust and stay competitive.

In the end, Kurzarbeit has been a successful policy for helping employers to hold on to skills and for keeping unemployment at bay during the crisis. The trouble is in an upturn, the same policy can end up locking skills into firms and interfering with the kind of labour market mobility that a growing economy needs. It can also end up protecting unviable jobs. As the crisis recedes and the recovery takes hold, Kurzarbeit will have to be phased out too.


References

OECD (2010), Employment Outlook, Paris, see www.oecd.org/employment

For more on this issue, please contact Alexander Hijzen in the OECD Directorate for Employment, Labour and Social Affairs.

See also www.oecd.org/germany and visit www.oecd.org/berlin

©OECD Yearbook 2011. Updated from OECD Observer N° 280 July 2010




Economic data

GDP growth: -1.8% Q1 2020/Q4 2019
Consumer price inflation: 0.9% Apr 2020 annual
Trade (G20): -4.3% exp, -3.9% imp, Q1 2020/Q4 2019
Unemployment: 8.4% Apr 2020
Last update: 9 July 2020

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