Via IMF (Den Internationale Valutafond)

<Working in Germany during the pandemic.  Kurzarbeit is a social insurance program whereby employers reduce their employees’ working hours instead of laying them off (photo: xxxxbr>


Working in Germany during a pandemic. Kurzarbeit is a social insurance program whereby employers reduce their employees’ working hours instead of laying them off. (photo: Patrick Pleul/dpa/picture-alliance/Newscom)

Kurzarbeit: Germany’s Short-Time Work Benefit







June 15, 2020
















The COVID-19 pandemic has generated renewed interest in short-time work programs—the state-sponsored work-sharing schemes aimed at saving jobs. Kurzarbeit, Germany’s short-time work program, is widely considered the gold standard of such programs.

Kurzarbeit, Germany’s short-time work scheme, was instrumental in keeping employment
stable during the global financial crisis. But this crisis is likely
to be even more profound, and affect more sectors of the economy. In an
interview with IMF Country Focus, the IMF’s
Mission Chief for Germany, Shekhar Aiyar, discusses whether the program is
likely to be effective this time around.

What are the main features of Kurzarbeit?

Kurzarbeit is a social insurance program whereby employers reduce their
employees’ working hours instead of laying them off. Under Kurzarbeit, the
government normally provides an income “replacement rate” of 60 percent
(more for workers with children).

That is, a worker receives 60 percent of his or her pay for the hours not
worked, while receiving full pay for the hours worked. So, for example, a
worker would only experience a 10 percent salary loss for a 30 percent
reduction in hours. The program usually runs for a maximum of 6 months
consecutively.

Kurzarbeit is, in many ways, an excellent crisis management tool. In a deep
recession, it protects workers’ income and therefore supports aggregate
demand. Since workers do not lose their jobs, they have less incentive to
save on a precautionary basis. And companies retain firm-specific human
capital, while avoiding the costly process of separation, re-hiring, and
training.

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It is also worth mentioning that Kurzarbeit is an addition to private working-hour flexibility arrangements. Employees in
Germany are typically allowed to work overtime and accumulate credit on
their “working time accounts”. These can then be drawn down during
recessions with no effect on paychecks. Firms are allowed to use Kurzarbeit only when working time accounts are exhausted, which helps contain fiscal
costs.

Are there any disadvantages to the program?

Some economists have argued that excessive reliance on Kurzarbeit during
normal times could potentially reduce labor market flexibility, keeping
workers in jobs that eventually need to disappear, and increasing the
divide between workers in more and less protected segments of the labor
market.

To avoid such outcomes, and limit the fiscal costs of the program,
Kurzarbeit entails some co-financing components. In particular, the
employer has to pay 80 percent of the total social security contributions
owed on the reduced working hours. This cost-sharing element ensures that
Kurzarbeit is not the first and only resort of employers who need to reduce
production.

But all parameters of the program—including the employers’ share of social
security contributions—can be relaxed during a serious crisis to discourage
mass layoffs. This was the case during the global financial crisis and it is happening again
now. These cyclical adjustments to the program help strike a delicate
balance between providing relief during deep recessions, while not
introducing too much rigidity into labor markets during normal times.

How effective was Kurzarbeit during the global financial crisis?

Germany was the only G7 country that did not experience a fall in
employment in 2009. Remarkably, this was the case despite a large
contraction in GDP (of almost six percentage points), owing mainly to a
collapse of external demand.

 

Work-sharing was an important factor explaining this success. We estimate
that about a third of the reduction in working time per employee was due to
Kurzarbeit, with the rest explained by other margins of flexibility (such
as running down working-time accounts and accumulated leave balances).

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Other factors might have also been at play. It could be argued, for
example, that the exceptional stability of employment in Germany during
the global financial crisis was partly the result of earlier wage moderation, and a high
degree of specialization of manufacturing workers, both of which made
labor hoarding affordable for employers during the global financial crisis.

The strong performance of employment during the global financial crisis bolstered domestic
demand, with stable labor income supporting private consumption, and
reducing the need for precautionary savings. This opened the way to a rapid
recovery.

How is Kurzarbeit faring during the COVID-19 pandemic?

The pandemic is expected to have a much broader impact on the German
economy than the global financial crisis. The global financial crisis mainly affected the manufacturing sector via
collapsing import demand from trade partners. In contrast, the confinement
measures taken to fight the pandemic have forced temporary business
closures in many sectors. Therefore, several changes to Kurzarbeit’s
features have been implemented or announced, with a view to making the
scheme temporarily more attractive to employers and employees alike.

For workers, Kurzarbeit will now provide greater income protection if there
is a prolonged reduction in work hours. The replacement rate, starting at
60 percent for the first three months, will increase to 70 percent during
the 4th to 6th months, and further to 80 percent from
the 7th month. The maximum duration of the program has been
extended to 21 months. Moreover, the coverage will be
expanded to temporary workers (about two percent of total employment).

For employers, the most important change is that their social security
contributions have been waived. The requirement to exhaust working-time
account balances before claiming Kurzarbeit has also been suspended.

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Finally, firms no longer need to reduce working hours for at least 30
percent of their workers in order to be eligible for Kurzarbeit; the
threshold has been lowered to 10 percent. Together, these changes make the
scheme much more attractive to employers.

Kurzarbeit already seems to be playing an important role in preserving jobs
during the current pandemic. From the beginning of March to the end of
April, the number of workers who applied for Kurzarbeit exceeded 10
million, or about 20 percent of the labor force—a much greater number than
peak applications during the global financial crisis—while unemployment has increased by less
than 0.4 million.

What is your overall assessment?

Overall, the German government is doing precisely what should be done
during deep recessions: making Kurzarbeit more flexible, more attractive to
employers, and more generous to employees, while expanding coverage across
sectors and across different types of jobs. This will come at an increased
fiscal cost, but one that is well worth paying.

However, the profound impact of this crisis on the labor market cannot be
overcome by Kurzarbeit alone. The pandemic is affecting far more sectors
than the global financial crisis which, for Germany, was mainly a manufacturing story. In
particular, marginal employees—who disproportionately work in the services
sectors—do not make social security contributions, and are therefore not
covered by Kurzarbeit.

They are among those likely to suffer the most from the sharp recession. To
avoid potentially large social costs, the government should consider
alternative ways to provide income support for this vulnerable segment of
the population.