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News : EU Economy Last Updated: Dec 7, 2009 - 5:50:40 AM

Kurzarbeit - - Germany's short-time working scheme
By Michael Hennigan, Founder and Editor of Finfacts
Dec 4, 2009 - 4:26:09 AM

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Kurzarbeit - - Germany's short-time working scheme is due to be extended. The publicly subsidised stimulus measure supported 1.056m workers in September, compared with 1.516m in May, when demand for it peaked, according to Bundesanstalt für Arbeit, the federal labour office.

The state pays up to 67% of a worker's salary for a period of up to two years.

Last Tuesday, the Bundesanstalt für Arbeit reported that German unemployment fell unexpectedly by 7,000 month-on-month in November to 3.422m. The adjusted unemployment rate was 8.1%. Also on Tuesday, Eurostat, the EU statistics reported that in October, the harmonised German unemployment rate was 7.5% compared with 7.1% in October 2008.

In September, German exports were 18.8% below the levels of a year earlier.

Peter Löscher, head of the industrial giant Siemens, had publicly advocated Kurzarbeit, because of fear of losing key expertise and to avoid mass redundancies in an election year.

Industrial output accounts for about 24% of German GDP (gross domestic product), the highest of any large developed economy and almost double the UK’s 13%. This year Germany’s engineering and electronics industry is heading towards an aggregate loss for the first time since the second world war, according to industry group Gesamtmetall.

The core firms of Germany's export engine are the old family-owned "Mittelstand" enterprises and in July 2007, Deutsche Bank Research highlighted the importance of the machine tools sector when it said that the typical German mechanical engineering company employs nearly 150 people and generates annual turnover of €26m. In 2006, the sector’s roughly 6,000 businesses with a combined workforce of some 873,000, generated revenues of €167bn.

Avoiding losing skilled workers is very important to such an industry.

Deutsche Bank Research, in a commentary on Thursday, said that the German government is currently examining whether to renew funding once again for Kurzarbeit. It said it's still too early to say whether short-time working will successfully guide Germany through the recession or else erode productivity gains of the past few years and lastingly impair the competitiveness of German companies.

DBR economist Sebastian Kubsch says that in “normal” times, Germany makes funding available for Kurzarbeit, for six months. As part of the government’s Konjunkturpaket II stimulus programme, it was decided that a company unable to make full use of its capacities may keep employees on staff in a short-time working scheme for up to 24 months, if the company applied for help, by the end of 2009. This means that workers who are put on short-time work from year-end 2009 may continue to be employed on reduced hours up to end-2011 - - i.e. in a period for which many observers already predict a noticeable easing of the recession’s impact on the labour market. The draft legislation tabled by the labour minister would mean a further prolongation of this period until mid-2012 - - with the costs for companies probably jumping significantly.

Kubsch says the short-time working arrangements cannot help but compromise the competitiveness of German companies.

Since the onset of the crisis, labour productivity has declined by 6% in Germany. There was initially a synchronous decline in the United States and the United Kingdom which continued up to Q1 2009. But then companies in these countries started to severely reduce their headcount, with productivity rebounding as a result.

Germany has not seen a major wave of redundancies up to now - - thanks to Kurzarbeit schemes. But this has partly resulted in German labour productivity increasing only with a time lag and to a lesser degree. The picture looks similar for the development of unit labour costs. These have grown by close to 8% since the crisis started. While the nearly synchronous development of unit labour costs is comparable with previous crisis patterns, the slump in German labour productivity is particularly pronounced.

The economist says that declining productivity and related increases in unit labour costs will worsen the competitive standing of Germany’s industrial companies in the medium term, though. If the economy should recover quickly and German companies are able to run up capacity utilisation towards pre-crisis levels thanks to strong order intake, not only productivity would rise. Rather, short-time working would help pave the way back to the growth path while proving to be a positive factor of competition. There would be no need to recruit new highly skilled employees. They would merely need to be “reactivated”. However, he says it remains to be seen whether this development will indeed materialise in view of the structural distortions in certain sectors, such as the car industry, and the expectation that Germany will tend to grow at a pace below its potential in the foreseeable future.

Sebastian Kubsch says one thing is certain: it makes little sense from an economic-policy standpoint to extend the funding for short-time work beyond the year 2011. On the contrary, such funding could result in unit wage costs persisting at an excessively high level and blocking necessary adjustments in the labour market (see the German Council of Economic Experts’ annual report for 2009). It would then be most doubtful whether Germany’s industrial companies could continue to win increases in export trade over the coming years.

Kubsch says the short-time working model should remain what it is: a short-term measure to prevent companies from reacting with exaggerated moves as a result of the huge demand shock. However, it would be inadvisable to think of establishing such an arrangement as a permanent labour-market instrument. Structural changes within and between economic sectors and thus related shifts in the demand for labour should be possible in future, too, and not be postponed by false incentives such as a short-time working arrangement that overstays its welcome.

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