Sunday, September 22, 2013

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.

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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.

                   Graphic: German and US Vital Statistics

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. 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.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.

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