The Price of Saving Jobs in Germany

Germany's "short-work" policy, which allows companies to put workers on reduced schedules rather than lay them off, showed the world how to survive a recession without losing jobs. It turns out there's a trade-off: As the economy recovers, it looks like hiring will be sluggish. That could stymie household spending and slow growth.

While the worst recession since World War II pushed up unemployment in the U.S. to 10.1 percent, a 27-year high, in Germany the rate fell well below 8 percent, a 17-year low. Last year the government subsidized employers, including Siemens (SI) and Volkswagen, so they would keep employees working at reduced hours rather than fire them. Almost half a million jobs were saved, a feat Chancellor Angela Merkel recently called a "minor miracle."

Under the short-work, or Kurzarbeit, plan, companies can temporarily move employees onto shorter work schedules when demand is weak. The companies pay only for the hours worked, while the government provides up to 67 percent of the workers' remaining wages. The program supported up to 1.5 million employees at some 63,000 companies, according to the Federal Labor Agency. In March, the latest month for which data are available, some 693,000 people were still working fewer hours.

The short-work idea dates to 1910, when the government compensated workers who faced a slump in the potash and fertilizer industry. In 1924, when unemployment reached 11 percent, the government introduced nationwide short-work policies similar to those today.

Another tool that has contained unemployment is the work-time account, which allows German companies to reduce employees' working weeks during downturns. Later, when order books fill up, the companies don't have to pay overtime—employees work the hours they lost during the downturn and get paid ordinary wages. Trumpf, a maker of machine tools, electronics, and lasers, has such an agreement with its unions: Employees work 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 this 500-hour buffer, then switched 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," says Trumpf Executive Vice-President Gerhard Rübling. "We had layoffs in foreign markets with less flexibility, such as Spain, Poland, and, partly, the U.S."

The downside is that companies won't need to hire for some time. Labor agency chief Frank-Jürgen Weise says companies cut working hours by an average of 30 percent in the recession; they can soak up those hours before having to hire again. "We won't see a mass of new hires as in previous upswings," he says. His agency estimates that employment will rise next year by just 30,000 to 50,000 jobs.

Without new hiring, consumer spending in Germany will likely remain sluggish, and the economy is expected to expand less than 2 percent this year and next. "Short-time labor certainly helps to shoulder a temporary loss of work in times of crisis," says Andreas Rees, chief German economist at UniCredit MIB in Munich. "But it's not a panacea. There's no job-market miracle."

The Bottom Line: With help from the government, German companies managed to save half a million jobs. Hiring new workers may prove difficult.

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