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News : EU Economy Last Updated: Apr 29, 2010 - 6:30:01 AM

Germany’s jobs miracle: Short-time work, flexible contracts and healthy companies; Unemployment rose only 200,000 from October 2008 low
By Finfacts Team
Apr 28, 2010 - 5:48:27 AM

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Germany's jobs miracle: Despite enduring the worst recession since 1945, Germany achieved a remarkable success in holding unemployment growth at about 200,000 from an October 2008 low, through a mix of short-time work, flexible labour contracts and healthy companies coming into the downturn.

Deutsche Bank Research in a report published on Tuesday, says that while pessimists had forecast at the onset of the recent economic crisis that the jobless total would eventually rise to over 5 million and the unemployment rate to over 12%, the German labour market remained relatively stable. The number of unemployed has increased by barely 200,000 to a seasonally adjusted 3.38 million since its low in October 2008. Not even the unusually severe winter resulted in any significant increase. Since summer 2009 the number of unemployed has even been on a declining trend.

All in all, the unemployment rate has risen by less than ½ pp, to 8% at last reading. Among the major industrial countries, Germany posted one of the smallest increases in unemployment anywhere, which comes as a surprise since German GDP took one of the hardest hits in 2009 at minus 5%, outstripped only by Ireland and Finland. In France, the contraction was not even half as pronounced at 2.2%. According to International Labour Office (ILO) data, since Q4 2008 the standardised unemployment rate has risen by 1 to 1 ½ pp in Belgium, the United Kindom and the Netherlands, close to 2 pp in France, roughly 5 pp in Spain and some 6 pp in Ireland. However, during the last two decades, Germany‘s performance differed considerably from that of the other countries. After reunification, employment grew by an average of 0.2% p.a. in Germany, noticeably trailing the trends in France and Italy (0.7% p.a.) and Spain (2.6% p.a.) in particular. Now, Germany has miraculously outperformed with a "mini- Beschäftigungswunder" (employment miracle).

Despite the deepest recession in post-war history the German labour market has remained surprisingly stable. Barely 200,000 jobs have been lost since October 2008.

  • The factors responsible for Germany's jobs miracle were the extension of the Kurzarbeit short-time work scheme, less paid overtime and the reduction of positive balances on working-time accounts. All in all, the cutback in working time saved around 1.2 million jobs.

  • The ability to weather the storm was predicated on the greater flexibility of the German labour market and in particular the financial health of companies before the crisis.

  • However, companies are probably gradually running out of workforce management options, so the unemployment rate is set to inch up further in 2010/11.

  • With an unemployment rate of only slightly over 9% by then, this would be a success story by international standards.

The report says with the onset of the economic crisis in autumn 2008 the number of short-time workers skyrocketed, peaking at over 1.5 million in mid- 2009. This was the highest reading since the reunification years when the number of short-time workers had climbed to over 2 million. Since mid-2009 the number has declined again by a good 40%, to just under 0.9 million. The reduction of short-time work in summer 2009 was probably attributable to the holiday season, but the further decrease towards year-end 2009 suggests that companies started to increase working hours again as their order books swelled in the course of the global recovery. On average, short-time workers were employed for roughly two-thirds of their normal working hours.

The Deutsche Bank Research economists Stefan Schneider and Bernhard Graef say that not only the extension of the short-time work programme but also other factors can help explain Germany‘s jobs miracle. These are mainly attributable to a labour market that has become more flexible as a whole thanks to more modern collective wage agreements and the Hartz labour and welfare reforms enabling companies to react more nimbly in adjusting working hours when demand slumps and thus to secure employment. The opening clauses agreed in the collective bargaining process were used to adjust working hours and wages to match order levels.

The fact that the companies could respond so flexibly to the collapse in demand and nearly maintain their headcounts was not only attributable to the more flexible labour market structures but above all to their financial health. An analysis by Germany‘s Bundesbank says that in comparison with past recessions, the companies entered the downswing with higher cash flows, better profitability and noticeably more robust financial health.

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