Germany’s New Labor Market Miracle

Prof. Dr. Klaus F. Zimmermann

IZA, DIW Berlin und University of Bonn

Stockholm, Sweden
March 24, 2009
Overview: The German Labor Market

► High unemployment central problem in reunified Germany

► This has often been linked to:
– The high level of employment protection
– The high labor costs
– The strictly regulated labor market
► “Hartz Reforms” in 2005: policy shift towards activation
► Economic crisis: Germany’s New Labor Market Miracle
– Internal flexibility
– Short-time work
– Sector-specific crisis
– Automatic stabilizers

2
Unemployment in Germany (1960-2010) Dotcom bubble

German Hartz reforms

reunification

Oil crises
Post-war
economic boom

Source: Federal Employment Agency

► In October 2008 the unemployment dropped under the level of 3 million for the first time since 1992
► This might be an indication that the fundamental structural problems of the German labor market
could have been decisively loosen by the Hartz reforms

3
Evolution of the German Labor Force (1992-2007)
100% Inactive
Decrease in the share of inactive individuals
25% 21% Unemployed
25% 24%

Unemployed
75% 7% with job
6% 8% 7%
Self-
7%
6% employed
6% 4%
5% 2% Marginal /
4% 4% Growth of 4% 5% irregular
50% 3% flexible jobs 3% 3% Agency work
7%
8% 10% 11%
Temporary

Vocational
25% education
45%
41% 40% 38% Permanent
part-time
Decrease in the share of permanent full-time employment Permanent
full-time
0%
1992 1997 2002 2007 Source: GSOEP

4
Unit Labor Costs Across Countries (1990-2008, 2000=100)

Germany’s international
competitiveness has
increased substantially
►relatively strong position
when crisis hit Germany

Source: OECD.

5
Germany‘s Reaction to Overcome the Crisis:
Demystifying the New Labor Market Miracle
► Astonishingly mild response of the German labor market
to the severe demand shock induced by the crisis
► Several factors played an important role:
– Short-time work created scope for buffering capacity within firms
– Labor market reforms and behavior of social partners
– Crisis mainly affected export-oriented manufacturing firms,
which were engines of growth before the crisis
– Those firms face a shortage of qualified workers: dismissals
would entail a significant loss of firm-specific human capital
► Firms followed a strategy of massive labor hoarding
► By contrast, comparatively high employment protection
legislation did not play a major role

6
 GDP and Employment Decline in OECD Countries
-12 -8 Employment Decline (%) -4 0
AU PL 0
GR
IL CH
GDP and employment NZ KR NO
decline since start of CA
US PT BE FR
crisis (country- ES
AT CL
specific GDP-based UK -5
CZ NL
turning points) SE
IT DE LU
HU DK
JP
IS FI SK
MX -10
IE
RU
TR

-15

EE

Source: OECD Main Economic Indicators, own calculations. -20

7
Different Labor Market Impacts of the Crisis

What are the underlying reasons for the different

labor market impacts across countries?
► Duration and depths of the crisis
► Industry structure of the economy
(e.g., share of export-oriented or “vulnerable” sectors)
► Size, timing and structure of discretionary measures
(mainly stimulus packages)
► Labor market institutions, especially labor market regulation,
collective bargaining, active and passive labor market policies

8
Share of Vulnerable Sectors in OECD Countries (2007)
50%
Real estate, renting and business activities
45% Construction
Manufacturing
40%
Mining and quarrying

35%

30%

25%

20%

15%

10%

5%

0%
Turkey

Italy

Hungary
Czech Republic

Norway
Slovakia

Latvia

Switzerland
Slovenia

Cyprus
Greece
Bulgaria

Poland

Spain

Croatia

Austria

Ireland

Sweden

France
Portugal

Finland

Lithuania

Belgium

Denmark

Netherlands
United Kingdom
Romania

Germany

EU27

Source: Eurostat, based on OECD analysis of

vulnerable sectors.

9
Sectoral Employment Change in the EU (Q2 2008 – Q2 2009)

10
Automatic Stabilizers: Wide Differences Across the EU
Stabilization of demand after a 5% income shock or 5 PP rise in unemployment

Source:
Dolls et al. (2009)

11
Discretionary Expansion of ALMP Expenditures (2008-2010)
A s a % of GDP (lef t-side scale) A s a % of 2007 A LMP expenditures (right-side scale)
% of GDP % of 2007 A LMP expenditu
0.50 100
484%
0.45 90

0.40 80

0.35 70

0.30 60

0.25 50

0.20 40

0.15 30

0.10 20

0.05 10

0.00 0
Japan
Ireland

Korea

Spain
France
Austria

Poland
Finland

Greece

Mexico
Canada

Sweden
Australia

Belgium

Norway

Portugal
Germany

lovak Republic

United States
nited Kingdom
Source: OECD Employment Outlook 2009.

12
Specific German Feature:
Working Short-Time to Overcome the Crisis
► Institutional arrangements:
– Short-time working benefits: 60 percent of net earnings
(67 percent with children)
– Maximum period of eligibility extended to 24 months (until 2009),
now 18 months
– Social insurance contributions are reimbursed at a rate of
50 percent in the first six months of short-time work
– Beginning with the seventh month, social insurance contributions
are reimbursed at a rate of 100 percent
– Training measures for employees receive considerable
financial support during short-time work (e.g., social insurance
contributions are reimbursed at a rate of 100 percent)
► Extensive use of short-time work, especially in export-oriented
sectors to maintain highly qualified workforce

13
 Stock of Short-time Workers in Germany (2007-2009)
1,600,000 Source: Federal Employment Agency

1,400,000 About 4% of all employees,

11% in manufacturing,
1,200,000 20% in car industry, Ave ra ge 2009: 1,142,67
Stock of short-time workers

about 350.000 FTE

1,000,000 (~1PP unemployment rate)

800,000

600,000

400,000

200,000 Average 2008: 101.540

Average 2007: 68,317

0
Ja 7

Ja 8

09
M 9
M 7

M 8
Se 7

Se 8

Se 9
M 09
M 07

M 08
No 7

No 9
No 8
7

9
l-0

l-0

l-0
0

0
0

0
-0

-0

-0
v-

v-

v-
n-
n-

n-
-

-
p-

p-

p-
ar
ar

ar

Ju

Ju
Ju
ay

ay

ay
Ja

14
Aggregate Working Hours in Germany (1998-2009)

58,0

Internal flexibility in the

billions per year)

German labor market:

57,5
less overtime, working time
accounts, short-time work
57,0
(inJahr
hourspro

56,5
Mrd. Stunden
Aggregate working

56,0

55,5

Source: Arbeitskreis “Erwerbstätigenrechnung des Bundes und der Länder”.

55,0
1998 2000 2002 2004 2006 2008

15
Conclusions (1/3):
German Miracle not only Short-time Work
► In general: working time flexibility, i.e., less overtime,
working time accounts (about -4% hours worked)
► Complementary policies to protect manufacturing:
massive expansion of short-time work
► Job losses concentrated at flexible margin of manufacturing
(temporary agency work -20% in 2008/09, compared to -4% in
other manufacturing jobs) while firms are still reluctant to
dismiss skilled labor force
► Germany as an „extreme“ case of internal flexibility
► Not responsible for the swift recovery:
– Stimulus packages did not start before mid-2009
– Limited scope of controversial “cash for clunkers” program

16
Conclusions (2/3):
Labor Market Institutions and Automatic Stabilizers
► Countries with existing routines to quickly adjust fare
relatively well in times of the crisis:
– No need for discretionary measures or extensive reforms
– Automatic stabilizers in tax and transfer system
– Previous reform efforts (e.g., activation policies)
► Few policy innovations, but relatively strong parametric adjustments
(e.g., extension of short-time work in Germany)
► No comeback of passive measures so far (e.g., early retirement)
► No evidence for downsizing ALMP or automatic stabilizers
(quite the contrary)
► “Flexicurity” still serves as the (European) role model for
institutional reforms

17
Conclusions (3/3):
Short- and Long-Term Implications of the Crisis
► Countries which fare relatively well so far in terms of the
unemployment impact of the crisis are not necessarily
the countries that fare best in the medium and long run
– Internal flexibility in highly regulated labor markets as an
adequate short-term measure to keep unemployment low
and to sustain qualified workers employed
– But at a certain point, structural adjustments and labor
reallocation are the better alternative (and inevitable)
► Paying the bill later? Trade-off between short-term stabilization
of existing jobs and creation of new jobs
► Crisis will speed up structural change, at least in the longer run

18
Prof. Dr. Klaus F. Zimmermann
IZA, DIW Berlin und Universität Bonn

IZA, P.O. Box 7240,

53072 Bonn, Germany
Phone: +49 (0) 228 - 38 94 - 0
Fax: +49 (0) 228 - 38 94 - 180
E-Mail: director@iza.org

www.iza.org