Betting on an Upswing in 2010 Germany's Massive Job-Saving Program Could Still Fail

Germany's short-time working program has helped prevent massive unemployment during the current recession. Although the model has been admired internationally, its biggest test is still ahead. The hugely expensive scheme is a risky bet that the economy will turn around in 2010.

The steel industry has been hard hit by the downturn.
DPA

The steel industry has been hard hit by the downturn.

By and


If there was any proof that the phenomenon of government-funded short-time working programs, known in German as Kurzarbeit, had become established at the center of German society, it had to be a call made by an ice hockey club in the western state of North Rhine-Westphalia.

The club had been eliminated before the play-offs, which translated into reduced revenues. The team's manager, who treats his club as an ordinary business enterprise, put in a call to Christian Rauch, an expert with Germany's Federal Employment Agency (BA). He asked Rauch whether his players would qualify for the short time work program, and whether the employment agency would pay their salaries under the scheme.

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Rauch is sitting in his office on the fifth floor of the Federal Employment Agency in the southern city of Nuremberg. Hardly anyone in Germany is more familiar with the short-time working program than he is. Ironically, the issue has been keeping Rauch so busy that he is in very little danger of being put on short time himself.

Rauch, who is in his mid-40s, heads a department that specializes in the short-time working initiative, among other social security programs. He has been in his current position for about two years, and has worked for the agency for more than 20 years. He says he has never experienced such interest in a social security program as he is seeing today.

Spending More Time at Home

Sharp declines in orders have already prompted close to 60,000 companies to reduce their employees' working hours under the program. This year, millions of people in Germany were confronted with the phenomenon of having to spend less time in their offices or workshops and more time at home.

Some have seen their working hours reduced by about 30 percent, while others have been faced with no work at all. Under the short time working program, the Federal Employment Agency pays workers about two-thirds of their net lost wages. It also generally pays half of employers' social insurance contributions, and it even pays the full employers' contributions after workers have been on the program for six months, or if they are taking part in training programs.

The program embodies the German idea of the social welfare state more than almost any other initiative: Instead of letting some of their workers go immediately, companies reduce the working hours of large numbers of employees for a set period of time, and the government offsets the costs.

Normally, the short time working program plays a relatively insignificant role compared to the dozens of other methods that the German state uses to influence the labor market. In September 2008, only 39,000 people were taking advantage of the scheme. A year later, that number had shot up to 1.056 million workers.

In 2009, short time work and the so-called "scrapping premium" for used cars (similar to the US's "cash for clunkers" program) were Germany's most important tools in combatting the economic crisis. Each program cost the government about €5 billion ($7.15 billion). But it will only be in 2010 that it becomes clear whether these massive efforts have in fact protected the country from real social disruptions.

A Buffer and a Narcotic

It is already clear that the short-time working program has simultaneously been a lifesaver, a buffer and a narcotic. Frank-Jürgen Weise, head of the Federal Employment Agency, is already warning that the worst is yet to come for some industrial sectors, especially the machine-tool and auto industries. "Hundreds of thousands are currently still on short time, but that won't be sustainable in the long run," he says.

Former Labor Minister Olaf Scholz repeatedly modified the rules for the program to prevent waves of layoffs. As recently as the summer, there were fears that unemployment in Germany would exceed the 4 million mark this year. But even though the German economy declined more sharply than in almost any other industrialized nation, unemployment has only increased moderately to date. In most countries, like the United States and Spain, the economic downturn went hand-in-hand with devastating declines in the employment market. For this reason, rarely has an initiative found so much support across ideological lines in Germany as the short-time working program.

In past crises, companies often laid off their workers and then rehired them later on. Today, however, there is a shortage of specialized workers, a trend that is expected to continue into the future. Every year, the number of older workers leaving the labor market exceeds the number of young workers replacing them, a gap that will amount to 140,000 people both in 2009 and 2010. "We are trying to retain our core workforce," says Franz Fehrenbach, CEO of auto parts supplier Bosch. "We are taking advantage of the short-time working program or reducing working hours, and we are not repeating the mistakes of the 1990s."

Averting Unemployment

"The instrument has proven to be effective," says Dieter Hundt, president of the Confederation of German Employers' Associations (BDA). Trade unions are also praising the program. "Thanks to the short-time working program, a rapid rise in unemployment was averted," says Ingrid Sehrbrock, deputy chairwoman of the Confederation of German Trade Unions (DGB).

The Organization for Economic Cooperation and Development admires the German model, and countries like Austria and Spain are emulating it. Even US economists are applauding the strategy. The German system of short-time working "works better in the recession," American economist George Akerlof told the Frankfurter Allgemeine Zeitung in an interview, adding that the program also "stabilizes the economy."

But what happens next? What happens if the German economy fails to maintain more than the status quo? Only recently, the federal cabinet decided to reduce the maximum benefits period for new applications from 24 to 18 months. Social insurance contributions will only be reimbursed until the end of 2010, at which point, if not earlier, the short-time working program will become more costly for companies. So what happens if business doesn't return to normal by then?

The tool can only help businesses bridge economic downturns. It cannot prevent, only delay, essential structural adjustments in sectors like the automobile industry, which is plagued by excess capacity.

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