Learning Labor Market Lessons from Germany

A German unemployment office: After a year, jobless benefits drop Alexander Hass Enstein/Getty Images

Frankfurt - Germany's economy is among the most troubled in the European Union, yet unemployment has so far risen only modestly. Why the sturdy labor market? In recent years, Berlin has rejiggered benefits and other programs to help ensure jobs don't go unfilled just because there's no one around with the right skills.

The progress may offer lessons for the U.S. Germany's experience suggests that generous unemployment benefits can make it too comfortable for an out-of-work welder to spend the day watching Desperate Housewives reruns rather than learning a new trade, so it helps to establish limits. But without incentives, companies are less likely to offer retraining—and workers may not see the benefit of trying something new.


Germany long had the highest ratio of unfilled jobs to unemployed people in Europe. Then, in 2003, Berlin launched the so-called Hartz reforms, ending generous unemployment benefits that went on indefinitely. Now payouts for most recipients drop sharply after a year, spurring people to look for work. From 12.7% in 2005, unemployment fell to 7.1% last November. Even now, after a year of recession, Germany's jobless rate has risen to just 8.6%.

At the same time, lawmakers introduced various programs intended to make it easier for people to learn new skills. One initiative instructed the Federal Labor Agency, which had traditionally pushed the long-term unemployed into government-funded make-work positions, to cooperate more closely with private employers to create jobs. That program last year paid Dutch staffing agency Randstad to teach 15,000 Germans information technology, business English, and other skills. And at a Daimler (DAI) truck factory in Wörth, 55 miles west of Stuttgart, several dozen short-term employees at risk of being laid off got government help to continue working for the company as mechanic trainees.

Under a second initiative, Berlin pays part of the wages of workers hired from the ranks of the jobless. Such payments make employers more willing to take on the costs of training new workers. That extra training, in turn, helps those workers keep their jobs after the aid expires, a study by the government-funded Institute for Employment Research found. CafÉ Nenninger in the city of Kassel, for instance, used the program to train an unemployed single mother. Co-owner Verena Nenninger says she was willing to take a chance on her in part because the government picked up about a third of her salary the first year. "It was very helpful, because you never know what's going to happen," Nenninger says.


Another successful program lets people who start a small business continue receiving full jobless benefits for an extra six months. Two-thirds of the subsidy recipients were still self-employed 41/2 years later. One beneficiary is Manfred Prusensky, who worked at a Kawasaki motorcycle dealership that shut down. Instead of collecting unemployment, which Prusensky regards as "hell," he receives $1,300 a month, which he's using to fund a motorcycle repair shop he launched. "It's going good," Prusensky says. "We've got lots to do."

The bad news is that unemployment could begin to rise sharply should the economy continue to struggle. If that happens, politicians may cater to nostalgia for the days when jobless benefits were almost as lucrative as working, and no one had to take a position they didn't want. With national elections coming in September, the center-left Social Democrats are calling for increased benefits for long-term unemployed people with children, while the more radical Left Party has made repeal of the Hartz reforms a centerpiece of its platform. "Politicians have an incentive to implement measures that are popular but could damage the labor market," says Hermann Gartner, an economist at the Institute for Employment Research.

And despite the progress, it's clear that Germany hasn't eliminated the mismatch problem. German universities still aren't turning out enough engineers and IT specialists, according to the Adecco Institute, a think tank funded by Swiss temp giant Adecco. Even amid the recession, an Adecco study says, 29% of large German companies have trouble filling technical jobs. The upside to such problems, though, is that companies cling to their best workers as long as they can. "I want to keep everybody," says Henning Fehrmann, president of Fehrmann Metal Processing, a family-owned outfit in Hamburg that employs about 70 people making heavy-duty windows for ships. "If I let them go and I need them one year later, it will be a huge investment to retrain them."

With Carol Matlack in Paris and Andrea Zammert in Frankfurt

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