For a nation often referred to as the economic powerhouse of Europe, Germany has dealt with the global economic recession characteristically well. The nation currently boasts unemployment of just 6.6 percent, compared to 9.6 percent in the rest of the E.U. Further, Germany’s GDP growth of 3.6 percent remains substantially higher than any other developed economy. The country’s rebound is all the more interesting for its rapidity. At the onset of the recession, Germany faced the second sharpest decrease its in real GDP since World War II, leading few economists to anticipate a swift recovery.
The credit may owe as much to Germany’s politicians as to its industrialists. Despite some gloomy predictions of German labor market inflexibility, the key to cushioning the economy’s cyclical unemployment may lie in the German labor market’s short-term work schemes. Kurzarbeit, as the system is called, has been a valuable tool for businesses responding to the labor downturn, while preserving worker employment. As other developed countries, particularly the United States, still struggle with stubbornly high unemployment, there may be lessons to learn from Germany’s success.
The Kurzarbeit Factor
At its base, Kurzarbeit entails a series of understandings between worker, firm, and government. According to Bernd Fitzenberger, professor at the University of Freiburg, Kurzarbeit involves an agreement in which companies promise not to lay off their employees if the employees accept a reduction in compensated work hours. In return, the German government reimburses a large portion of the reduced compensation directly to the worker. For instance, if employees work half of their original hours, the employer pays them for the hours worked, and the government agency pays a large portion of the remaining base wages, often under the condition of requiring employees to enter training or development programs.
As Fitzenberger argues, the system offers substantial benefits. “Kurzarbeit involves some form of ‘cost sharing’ between the firm, the employee, and the Bundesagentur [Ministry of Economics and Labor]. Earnings are reduced, the firm has lower labor costs, and the Bundesagentur subsidizes Kurzarbeit. This allows for labor hoarding when a firm faces a temporary reduction in the demand for its goods and the firm expects demand to pick up again in the near future,” Fitzenberger told the HPR. Adding to the success, working hour accounts created during the previous decade allowed employees to accrue overtime pay during boom years, and then collect on those hours during the recession. These credit balances from overtime working during prosperous times have been quickly reimbursed, contributing to sustained levels of income.
Skeptics Become Supporters
The Kurzarbeit’s structure springs from the composition of Germany’s economy. “The bottomline explanation of German success is its strong export performance,” asserted Peter Taylor-Gooby, professor of social policy at the University of Kent. Indeed, the German labor market benefited from two concurrent developments: the increased implementation of innovative contract schemes between the government and corporations and the quick rebound of international demand for German export goods. Because the export sector is highly skill-intensive, the government’s Kurzarbeit scheme has allowed companies to engage in labor hoarding by reducing the hours of their employees, thus cutting expenditures, while still retaining their skills.
Beyond the vagaries of the international markets, however, these programs have garnered substantial praise. Argues Philippe Aghion, professor of economics at Harvard, “instead of doing old-fashioned Keynesian policy, the legislature did a supply-side policy and targeted the difficult sectors: a targeted intervention of the labor market.” Kurzarbeit not only prevented massive layoffs but also grew popular with firms as a way to employ workers with adequate training, albeit in a reduced form. When the economy improves, companies may terminate the Kurzarbeit agreement and replace with full-time employment. The delayed process of hiring and training new employees would certainly be more costly and inefficient. A part of Germany’s economic recovery seems to stem from inventories produced under the parttime work schemes of the past years. “It is probably rational to have a Kurzarbeit scheme…in particular industries which…recover rapidly after recession and where skill is vital and there is a real fear of losing workers. It should be combined with benefit/retraining schemes for other groups too,” says Professor Taylor-Gooby.
The U.S. Question
Translating Kurzarbeit to the United States would seem a difficult task. While Germany’s economy revolves around a technologically advanced export economy, the U.S. economy is much more based on service and domestic consumption. Nonetheless, there may be benefits to implementation of the program in the U.S. economy. Companies rarely feel the need to maintain lower skilled service workers during an economic downturn, because they can be rehired and retrained in a short time. As such, economists argue, the U.S. would not be a good fit for the Kurzarbeit model. Aghion contests this notion because “the externality argument of violence and crime that coincide with high unemployment is independent whether the U.S. exports as much as Germany or not, also disregarding skill intensity.” Other American objections to Kurzarbeit derive from the fear that state aid that is given to uncompetitive firms may result in an excess number of them and a higher price level in the economy. Germany has dodged the bullet for two reasons: the Kurzarbeit scheme is only a short-term program that can be terminated easily, and the subsidized sectors have already displayed growing independence and abandonment of these programs. Without direct adverse consequences resulting from the program, fears would seem allayed.
Yet, not everyone is convinced that the U.S. would be interested in or benefit from taking on the Kurzabeit scheme. Says Fitzenberger, “I am not convinced to take one piece of labor market policy from one country and ‘export’ it to another country. Kurzarbeit is one piece of hours flexibility in Germany, like working time accounts or overtime regulations, which is much more needed in ‘normal’ times because of high employment protection.” Fundamentally, the U.S. views the role of the welfare state differently than Germany does, suggesting that Kurzarbeit may not be compatible with the U.S. market system. Adds Fitzenberg, “I am not sure that the U.S. would want to install such a labor agency and to introduce employment protection to the same degree as in Germany.”
Kurzarbeit certainly poses a powerful model of smoothing the business cycle and has demonstrated strong results in the wake of Germany’s recovery from the Great Recession. Despite concerns, United States economists should evaluate the feasibility of introducing a similar scheme to the American labor market as well. Though there will be tradeoffs between an efficient labor market system and strong labor protections, Kurzarbeit seems to have managed to serve in both roles well, a rare but promising industrial policy success.
Martin Steinbauer ‘14 is a Contributing Writer
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