Advancing a Free Society

Why Germany’s Unemployment Rate is Lower

Thursday, October 7, 2010

Michael Warren in his article “Why Germany’s Unemployment Rate is Lower” concludes that Germany’s practice of Kurzarbeit (“short work”) is a primary factor behind Germany’s shrinking unemployment rate. On this, see:

Kurzarbeit has been a part of German labor legislation since the days of Bismarck and the Weimer Republic. It was used on a massive scale in Eastern Germany after reunification, but its use as a counter-cyclical measure in 2008 and 2009 was unprecedented. Some 1.5 million German workers were on Kurzarbeit in this period. The number is currently about 800,000. If all Kurzarbeiter had been unemployed, Germany unemployment rate would almost have doubled.

We can contrast Germany’s Kurzarbeit with the implicit wage contract model used with negative effects by the U.S. auto and steel industries. With Kurzarbeit, a cyclical downturn means a reduction in work hours. Workers continued to be paid their regular hourly wage, but earn less because of the fewer hours. The lower earnings are subsidized around 60 percent by unemployment insurance and other subsidies. In the U.S. implicit wage contract model, cyclical downturns mean layoffs. Laid off workers do not seek other jobs because they are paid well above market wages, and it is better for them to wait to be recalled. Moreover, they receive unemployment benefits to cushion the income loss of the layoff. In both cases, employers benefit by not losing skilled workers who would have to be replaced with costly job searches and training during the upturn.

Continue reading Paul Gregory…

(photo credit: j.twist)