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Kurzarbeit assessed

August 19, 2009

A new report says the government's shorter working hours program saved hundreds of thousands of German jobs. But the program, known as 'Kurzarbeit', will cost German industry around five billion euros this year.

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Unemployed people at an employment office
The Kurzarbeit program is credited with keeping 400,000 workers off the doleImage: AP

A government program to support workers who have been temporarily furloughed due to the recession has saved as many as 400,000 jobs. But it also cost companies about five billion euros this year, according a report released this week by the IAB research institute, the research arm of the Federal Labor Agency.

As the economy began contracting last year, German companies responded by cutting their employees' working hours of in a bid to retain valuable, highly-skilled workers. Over 1.4 million Germans were working shorter hours by May of this year, the Federal Labor Agency estimated in its most recent employment report.

In order to prevent mass layoffs, especially with an eye towards national elections this September, Chancellor Angela Merkel's government agreed to support companies using Kurzarbeit by temporarily covering a portion of workers' wages and social welfare contributions.

"Overall the effects of the downturn have so far have been comparatively moderate," said Federal Labor Agency head Frank-Juergen Weise last month. "In particular, the significant use of the shortened working hour scheme has stabilized the job market."

The cost of Kurzarbeit

An empty auto parts factory
Reduced hours mean thousands of factory halls are empty for much of the weekImage: picture-alliance/ dpa

The federal government has spent six billion euros supporting the program. IAB researcher Eugen Spitznagel said despite the impression that the government had paid for much of the Kurzarbeit program, the companies taking part also spent about five billion euros in the form holiday pay and other contractual obligations.

"If the companies had to pay the costs of laying off workers, and then the costs of re-hiring workers when the upswing arrives, that would be a figure that's also in the billions," Spitznagel told Deutsche Welle in an interview, adding that workers have also paid about three billion euros, mostly in the form of lost wages.

Under the Kurzarbeit system, which is due to run through to the end of 2010, companies only pay for the hours that their employees actually work, cutting labor costs substantially. The German government then provides a workers with an allowance to make up some of the lost wages.

Workers without children get about 60 percent of their net salary, while those with children receive about 67 percent of their net salary. In addition, the government covers half of their social security contributions for the first six months of Kurzarbeit and 100 percent thereafter.

A short-term measure with long-term effects

A class of workers trains on computers
The Kurzarbeit program aims to retrain workers when they're not on the jobImage: AP

With the news last week that the German economy had technically climbed out of recession, growing a modest 0.3 percent in the most recent quarter, the question is now whether the recovery will be strong enough for companies to resume full working hours, Spitznagel said.

If not, the costs of the Kurzarbeit program could eventually prove too much for companies weakened by nearly a year's worth of falling sales.

"It's definitely a problem," Spitznagel said. "It's only going to pay off if the upswing comes, and only if it's robust. If there's stagnation in 2010, it won't help. We'll need a strong economic recovery."

The other danger, warns Humboldt University economist Michael Burda, is that the Kurzarbeit scheme may actually prop up weaker companies that should be restructuring and downsizing.

"If Kurzarbeit is being used to keep an East German toy factory open and in production that's trying to compete with the Chinese, who are going to crush them anyway, it's not clear this is a good idea," Burda told Deutsche Welle.

The massive costs of the Kurzarbeit program have also stretched the Federal Labor Agency's resources, which will eventually have to be replenished with higher contributions from workers and employers, Burda said.

"What I suspect is that by the end of this year or beginning of next year, pressures will be such that [the government] will have to start raising the contributions, but they can't do that as that will mean destroying more jobs."

Instead, Burda expects the government will be forced to end the Kurzarbeit program in order to prevent its budget deficit from ballooning further.

Author: Brett Neely
Editor: Sam Edmonds