Kurzarbeit - A German Achievement

Germany has penned a success story with its human capital amid the recent recession defying forecasts for an unemployment surge and setting an example for other developed economies.

The labor market of the biggest Eurozone economy has been surprisingly resilient in its most severe recession since the Second World War. One of the main reasons cited for the strong performance of the labor market apart from its improved flexibility is the government's short-time work scheme that saved several skilled jobs that would be needed later on when the economy rebounds.

It is better to have something than nothing at all. Validating this view, Germany's short-term working allowance scheme called Kurzarbeit successfully supported the labor market during tough times. Work sharing schemes exist in several economies, but the German one has been touted the most successful.

Under Kurzarbeit, the German government compensates as much as 67% of the foregone net wages of an employee, if the employer needs to cut wage cost and working times amid economic slowdown. When an employee is covered under this scheme, his/her social contributions such as pensions, health care, longtime care, jobless benefits are fully met by the Federal Employment Agency.

Further, if there is no work for an employee, he/she has to undergo training and skill development, costs of which are borne by the agency. Such training and development could come in handy at times of booming business. Temporary workers are also eligible for the scheme.

This sort of employment policy serves as an alternative to cutting jobs. The advantage to employers is that they can retain their trained staff during periods of economic slowdown as the government meets the salary cost. Employers can also avoid the cost of rehiring once the economic situation improves.

Kurzarbeit, though successful, is not immune to criticism. The Institute for Employment Research (IAB), a German government think tank, lists large dead-weight and displacement effects as one of the negative impacts of the short-time working scheme. Such schemes often retain wasteful jobs alive and slows down job reallocation remarkably when supporting jobs in sectors that are in structural decline, the group argues.

The institute also suggests a solution to limit displacement effects - which is to ensure that the duration of short-time working subsidies is limited. Further, the subsidies must be aimed at firms for whom the demand is only temporarily depressed and to workers who may find it particularly difficult to regain employment if made redundant.

The success of the Kurzarbeit partly lies in the nature of the global economic crisis, Stefan Schneider and Bernhard Graef of Deutsche Bank Research said in a note last month. With global trade being the transmission medium for the recent crisis, the economists noted that it was easier for short-time work to cushion the impact in terms of intensity and duration. Also, the cyclical pattern of the crisis, deflates the argument - at least partially - that short-time work acts to preserve existing structures and thus reducing the structural flexibility of the economy.

Short-time work is effective in addressing a temporary drop in demand triggered mainly by external effects, Deutsche Bank Research economists said. However, this labor policy measure is not a suitable instrument for addressing the long-term structural employment adjustments, they stated, citing the example of Spain, where the unemployment rate jumped to over 19% when the house price bubble burst.

According to official estimates, the German government paid out an estimated $16 billion in 2009 for the Kurzarbeit scheme as part of its economic stimulus package. This is a small amount when compared to the cost of supporting the unemployed. Nearly 1.5 million people were employed under the scheme while around 400,000 jobs were saved, which equals more than 1% unemployment.

Without working time flexibility measures taken over the last 10 to 15 years, Germany may have lost an additional 1.5 million jobs last year, pushing up the unemployment level above 5 million, Eckart Tuchtfield at Commerzbank reckoned in a recent note. An optimistic Tuchtfield does not see any further rise in unemployment by year-end, but forecast a slight decline to below 3.5 million.

In April, the Angela Merkel administration decided to extend Kurzarbeit until 2012. The government had earlier extended it to the end of this year.

"The companies are gradually approaching the limits of what they can do, also in view of their residual costs, so the unemployment rate will probably continue to inch up in 2011," Deutsche Bank Research economists said. "Anyway one looks at it, though, this would still be a German success story."

Unemployment in Germany declined sharply in April confirming the underlying strength of the labor market as the recovery gains momentum. The jobless total fell by a seasonally adjusted 68,000 to total 3.285 million. The latest month's decline is the biggest since January 2008, when it fell by 83,000. The labor agency attributed the drop to the an unexpectedly strong spring revival.

"There is still a chance that unemployment rises again as many workers' "Kurzarbeit" subsidies expire," Capital Economics' economist Jennifer McKeown said last week. "Either way, wage growth is set to remain very weak."

In its latest assessment released this week, the European Commission pointed out that recent wage agreements in both private and public sectors suggest only moderate wage growth for this year and next. This reflects the prime concern of the social partners to stabilize employment levels and avoid a strong rise in unemployment. Hence, the commission expects real unit labor costs to fall again in 2010 and 2011, but not to fully compensate the strong hike in unit labor costs in 2009. The Federal Statistical Office had cited the decline in the number of hours worked due to the reduction in overtime hours on working time accounts as well as short-time work as the reason for a strong increase in labor costs per hour worked in 2009.

As the money paid under the short-time work scheme reaches consumer directly, it flows to the market instantaneously. According to analysts, this was yet another reason that propped up consumer spending, a linchpin of the German economy.

An industrial recovery in Germany led by a continued rebound in exports should help underpin the resilience in the labor market, improve capacity utilization and lay the basis also for stronger domestic demand, the European Commission said. Germany's labor market outlook is markedly better than in previous forecasts, the commission said, which expects only a moderate increase in unemployment and limited job losses for 2010 and 2011. The unemployment rate, as per Eurostat definition, is forecast to rise to 7.8% this year from 7.5% in 2009 and to remain flat next year.

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