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Kurzarbeit: a German export most of Europe wants to buy

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Via Financial Times

The US is facing a tidal wave of jobless claims as the economic impact of coronavirus spreads across rust-belt states and beyond. In Germany, the hope is that a tried-and-tested policy tool, designed specially for such economic downturns, will keep mass unemployment firmly at bay.

The tool is Kurzarbeit, or shorter work-time, a policy that has been copied by so many other countries that one economist called it one of Germany’s “most successful exports”.

Under the scheme, companies hit by a downturn can send their workers home, or radically reduce their hours, and the state will replace a large part of their lost income.

A way for firms to hang on to skilled workers during a downturn, it “is one of the reasons why Germany recovered so quickly after the 2008-9 crisis,” said Anke Hassel, professor of public policy at the Hertie School in Berlin.

With their tradition of strong welfare states, Denmark, Sweden and Norway have all followed Germany by introducing large subsidies for workers who might otherwise be laid off.

The UK is now moving to introduce a similar programme: on Friday, Rishi Sunak, the chancellor, unveiled a coronavirus job-retention scheme under which employers can apply for a grant to cover most of the wages of people who have been furloughed and kept on the payroll, rather than laid off. Such grants, the UK Treasury said, will cover 80 per cent of the salary of such retained workers, up to a total of £2,500 a month.

Kurzarbeit follows a similar principle. Temporarily laid-off workers receive so-called “Kurzarbeitergeld” or “short-work money” from the Federal Labour Office (FLO), the agency which is also responsible for issuing unemployment benefit. The scheme promises them 60 per cent of their pre-crisis pay.

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Take-up is expected to shoot up in the coming days and weeks as corona-related turbulence spreads through the eurozone’s largest economy. In the past few days, industrial giants such as Volkswagen and BMW have suspended production in many of their plants, smaller Mittelstand businesses have had revenues and orders melt away while lockdowns have forced restaurants, pubs and hotels to close.

The scheme has existed since the early 1900s, but came into its own after the Lehman Brothers collapse of 2008. “It really contributed to the resilience of the German labour market following the global financial crisis,” said Alexander Hijzen, an economist at the OECD.

Partly thanks to Kurzarbeit, Germany’s unemployment rate fell from 7.9 per cent at the start of the great recession to 7 per cent in May 2009. By contrast, unemployment for the OECD as a whole rose by 3 percentage points during the same period, to 8.6 per cent. An OECD estimate said that, by the third quarter of 2009, more than 200,000 jobs may have been saved in Germany as a result of short-time work.

Behind the scheme’s success was its well thought-out design: it was ramped up fast in the initial phase of the 2008 crisis “but phased out quickly in the subsequent recovery”, Mr Hijzen said.

By contrast, other countries with similar programmes, such as Belgium and Italy, “use them more intensively in good times when they are less needed”. Meanwhile, in the Netherlands, “procedures are too complicated . . . to allow for a rapid take-up during economic crises”.

Ms Hassel said Kurzarbeit is perfectly tailored for a country such as Germany with such a strong commitment to vocational training. “Companies invest a lot in improving the skills of their workforce and, if there’s a crisis, they shouldn’t be forced to let them go,” she said. “If they do, they won’t be available in six months’ time.”

It was not surprising, then, that Kurzarbeit was one of the first tools the government grasped when the coronavirus crisis began to bite. Earlier this month the Bundestag rushed through legislation to expand the scheme and ease access to Kurzarbeitergeld: from now on, companies can register when just ten per cent of their workforce is impacted by an economic crisis, down from a third previously.

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The government now expects some 2.35m people to be drawing Kurzarbeitergeld, at a cost to the FLO of €10.05bn. The figure is much higher than the 1.4m who were receiving short-work money at the height of the global financial crisis. But the FLO, which is financed through contributions from workers and employers, has built up reserves of €26bn, much more than it had at the end of the 2000s.

Other countries with short-time work schemes have also tweaked their rules since the crisis began. Spain recently modified its ERTE system to ensure that workers temporarily suspended from their jobs can draw around 70 per cent of their salaries as social security.

France has also greatly expanded its existing chomage partiel (partial employment) system. Bruno Le Maire, the finance minister, said his €45bn of emergency measures included €8.5bn for two months of such state payments to laid-off workers.

Yet some economists wonder whether Kurzarbeit is adequate to the challenge now facing companies in Germany and beyond, many of which are fighting for their survival. Some firms may be past the point where wage subsidies will help.

“The big problem is that SMEs are having a really hard time generating revenues,” said Marcel Fratzscher, head of DIW Berlin, a think-tank. “We’re moving to a situation where direct financial transfers are needed.”

Additional reporting by Victor Mallet and Daniel Dombey

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