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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Germany published on 26 March 2010.
The labour market surprised on the positive side…
Unemployment had fallen significantly prior to the crisis, not least helped by past reforms in several areas of labour market policy and deregulation, and has remained surprisingly stable during this recession, both in comparison with past downturns and relative to other countries. While the increase in the unemployment rate in the average OECD country was 3 percentage points, the German rate rose by only one half percentage point although the fall in German GDP was above average. This was primarily due to increased flexibility on the firm level that allowed a reduction in labour input by decreasing working hours instead of employment. In addition, the short time working scheme, whereby the labour office replaces some of the lost income of employees if they work shorter hours, has been used extensively especially as this programme was made more generous during the crisis. The scheme has been used more intensively by those companies which reported difficulties finding skilled labour prior to the crisis, suggesting that fear about future labour shortages is one reason for labour hoarding.
…but some labour market policies hamper structural change
While the government’s efforts to prevent excessive lay offs during the recession have been broadly successful, the extent to which they prevent or delay structural change, which generally accompanies large downturns, should be closely monitored. It is therefore important to preserve strong incentives for workers and firms to leave subsidised short time work programmes at the earliest opportunity. In this regard, a further prolongation of the extended generosity of the scheme beyond the originally legislated date should be avoided. A further option going in this direction is to require firms that join the scheme from now on to pay back some of the short time work subsidies if workers are laid off in the period that follows the end of the short time work. Tapering the replacement rate over time to maintain search incentives for workers should also be considered. This would help to ensure that only jobs that are viable in the longer run are preserved by increasing the incentives for searching an alternative (full time) employer.
In the context of the downturn, strict protection of regular job contracts compared with other OECD countries threatens to create a dual labour market, in particular as regulations of temporary job contracts have been eased significantly. Those who lost their jobs have tended to have less protected work contracts (notably temporary work agency contracts) while regular workers, in particular those with very long tenure, are relatively well protected. Evidence suggests that too strict protection of regular job contracts may inhibit the flow of jobs towards their most productive uses in the economy, thereby hampering structural change. In Germany, job separations of workers on regular contracts take a long time and are often challenged in court, increasing the costs for employers. In addition, the requirement for work councils to approve dismissals lengthens the period before a dismissal notice can be given, notably in the case of disapproval as in this case the employer has to wait for a decision by the labour court. Lighter employment protection legislation could lead to less hesitancy to hire people with regular contracts once the recovery becomes self sustained.
Temporary agency workers and EPL
Note: The time series for temporary work agency workers has been seasonally adjusted using Census X12. For France and Portugal, employment protection data refer to 2009.
Source: Bundesagentur für Arbeit; Bundesbank; IW Zeitarbeitsindex; OECD, Indicators of Employment Protection, www.oecd.org/employment/protection.
Once the labour market has stabilized, the disparities in terms of protection between regular and non standard job contracts should be narrowed. To this end, the following measures should be considered:
- Shortening the period before a dismissal notice can be given, for example by reforming the requirement for work councils to approve dismissals while preserving the important consultation mechanism on the company level.
- Shortening the period between information about dismissal and the termination of employment for workers with long tenure.
- In case of dismissals for economic reasons, give employers the right to choose between paying a severance payment (while leaving the court route open for employees), in line with current regulation, or paying a higher unfair dismissal compensation which would replace the court route.
- Rethinking the further liberalisation of fixed-term contracts envisaged by the coalition agreement in order to lower the risk of dualisation on the labour market.
An increase in long term unemployment needs to be countered
As firms continue to deal with the downturn and a weak recovery, it is likely that unemployment will increase sharply. On current projections, the unemployment level could well rise by more than half a million (1% of the labour force) in 2010. Labour market policy will need to ensure that these unemployed receive enough placement services to reduce the risks posed by an increase in unemployment duration:
- Make sure Public Employment Services can adjust capacities to the larger workload.
- Reform the administration of the basic income scheme for jobseekers (recipients of unemployment benefit II) quickly as required by the constitutional court’s ruling. Any reform should be implemented in such a way that the procedures for the benefit recipients change as little as possible to ensure that the basic principle of the one stop shop remains in place.
- In addition, in case of a marked deterioration of the labour market, expand other active labour market programmes, such as training, hiring subsidies and mobility support.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
Eine Druckversion des Policy Brief in deutsch (pdf Format) kann ebenfalls heruntergeladen werden. Es enthält die Gesamtbeurteilung und die Empfehlungen, aber nicht alle oben gezeigten Grafiken.
The complete edition of the Economic Survey of Germany is available from:
For further information please contact the Germany Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Felix Hüfner and Isabell Koske under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.