Germany’s “short-work” policy showed the world how to survive a recession without losing jobs. Now it’s time to pay the price.
The country’s social welfare-driven economic model, which the International Monetary Fund says is helping to preserve labor-market rigidity, has sheltered it from the worst of the financial crisis. The cost is that as the economy recovers, hiring won’t pick up as much as it does in countries such as the U.S. or the U.K., posing a risk to growth in a nation that needs to ignite household spending.
“The government has done a great job keeping unemployment in check during the recession, there’s no doubt its policies have been a tremendous success,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. “The problem is the labor market, and by extension consumer spending, won’t get the boost it would have during the economic recovery.”
While the worst recession since World War II pushed unemployment in the U.S. to 10.1 percent, a 27-year high, in Germany the comparable rate fell to 7 percent, a 17-year low. Rather than firing workers as the economy contracted 5 percent last year, companies from Siemens AG to Volkswagen AG were subsidized by the German government to keep them on reduced working hours, saving almost half a million jobs. Chancellor Angela Merkel last week labeled developments on the labor market a “minor miracle.”
Under the so-called short-work plan, or Kurzarbeit in German, companies can temporarily move employees onto shorter working weeks to reduce costs during periods of weak demand. They pay only for the hours worked and the government provides up to 67 percent of the remaining wage.
The program supported up to 1.5 million employees at some 63,000 companies and saved as many as 478,251 jobs last year, according to the Federal Labor Agency. In March this year, the latest month for which data are available, some 693,000 people worked fewer hours. The government extended the payment of short-work benefits to a maximum of two years in May 2009. Before the crisis, it was limited to six months.
The idea dates back to 1910, when the government compensated workers who were put on shorter hours in the potash and fertilizer industry during an earnings slump. In 1924, when unemployment climbed to 11 percent, the government introduced nationwide short-work policies similar to those used today. A quarter of the German workforce was enrolled in the program at the time.
Another tool that has played a central role in containing unemployment is the so-called work-time account used by about half of all German firms. This allows them to reduce employees’ working weeks during downturns. The hours saved accrue in an account and can then be used during booms without adjusting wages.
“Companies have replaced rigidly agreed working hours with flexible labor schemes that allow them to breathe with the economy,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “Germany’s labor market is less inflexible than commonly thought.”
At Trumpf GmbH & Co. KG, a German maker of machine tools, electronics and lasers, each employee works up to 250 hours more than contractually agreed when business soars and up to 250 hours less when demand is low. When orders collapsed in November 2008, the Ditzingen-based manufacturer exhausted its 500-hour buffer before switching about 3,200 of its 4,500 workers in Germany onto the government’s short-work program.
“It was our top priority to keep our core workforce and preserve knowledge and experience for the next upswing,” said Trumpf Executive Vice President Gerhard Ruebling. “We had layoffs in foreign markets with less flexibility, such as Spain, Japan, Poland and partly also in the U.S.”
The downside is that firms won’t need to hire for some time. Labor agency chief Frank-Juergen Weise said companies cut working hours by an average of 30 percent; capacity they can now utilize before having to hire again.
“We won’t see a mass of new hires as in previous upswings,” he said, adding the labor agency estimates employment will rise next year by just “30,000 to 50,000 jobs.”
The Organization for Economic Cooperation and Development predicts Germany will experience a “jobless recovery,” with its unemployment rate rising to 8 percent next year as the U.S.’s declines to 8.9 percent.
“Gross domestic product in Germany can expand by more than 7 percent without any increase in employment, if hours worked per employee and hourly productivity were to rise back to their pre-crisis levels,” OECD economists said in a report on July 7. “Achieving GDP growth on this scale is expected to take several years, and thus it is unlikely that the steady decline in the unemployment rate during recent months will continue through the second half of 2010.”
That’s a challenge for Germany, whose economic Achilles Heel has long been the reticence of its consumers to spend. Even as exports boom, the Bundesbank forecasts GDP will rise 1.9 percent this year and 1.4 percent next.
“Short-time labor certainly helps to shoulder a temporary loss of work in times of crisis,” said Andreas Rees, chief German economist at UniCredit MIB in Munich. “But it’s not a panacea against structural problems. There’s no job-market miracle.”
Weise said the short-work policy appears to have “paid off” in broad economic terms. The labor agency spent 4.6 billion euros ($6 billion) on the program last year, or 13,675 euros for every full-time job preserved. That’s roughly comparable with the money the government saves on unemployment benefits and the costs companies would incur if they had to hire new workers in the upturn, he said.
“That’s assuming that short-work results in retained employment and workers aren’t fired when the policy comes to an end,” he said. “If a significant number of people on short- work are subsequently made redundant, then one would have to say the policy had been very expensive.”