The Use of Flexible Measures to Cope with Economic Crises in Germany

Werner Eichhorst, Institute for the Study of Labor (IZA)

Overview

1. Basic features, structural developments and crisis adjustment

2. Industrial relations and wage setting

3. Vocational training

4. Employment and social protection

5. Policy considerations

Basic features of the German system

Core of the labor market strong social protection employment protection collective bargaining co-determination highly developed internal flexibility

Growing segment of non-standard contracts fixed-term employment temporary agency work part-time self-employment

The recent transformation of the German labor market

Long period of stagnating employment persistent high employment

Structural change by 1. Stepwise de-regulation of non-standard contracts (mid-1980s)

2. in particular fixed-term contracts and temporary agency work

1. Stricter availability criteria for the unemployed and more coherent activation policies

2. Growing flexibility inside and at the margin of collective agreements

Performance of the German labor market during the crisis (IAB data)

2008 2009 20102011

(medium IAB scenario)

Real GDP, % +1.0 -4.7 +3.6 +2.4

Hours worked, % +1.2 -3.1 +2.9 +1.7

- In full-time +1.0 -4.0 +2.8 +1.7

- In part-time +2.6 +1.2 +3.4 +1.8

Total employment, % +1.4 -0.1 +0.5 +0.9

Total employment, 1,000 40,216 40,171 40,438 40,841

Employees covered by social insurance, %

+2.1 0.0 +1.2 +1.6

Unemployment, 1,000 3,268 3,414 3,238 2,927

Unemployment rate, % 7.8 8.1 7.7 7.0

Patterns of flexibility in European countries

Source: Eichhorst/Marx/Tobsch 2009.

Industrial relations

Different levels of interaction trade unions and employers

1. Company-level co-determination in larger firms

2. Plant-level co-determination via works councils

3. Sectoral/regional collective bargaining 1. sectoral trade unions and employer associations

2. without interference from the government

Low level of conflict constructive and pragmatic dialogue

Major source of societal problem solving capacities

Internal flexibility

Most advanced sytem of internal flexiblity

at company level

1. Working time flexibility1. via working time accounts (hours bank)

2. Functional/occupational flexibility 1. based on vocational training

2. continuous vocational training for skilled workers

3. Growing role of wage flexibility 1. negotiated at the plant level

2. even within existing sectoral agreements

Allows companies: restructure - remain competitive

Bargaining coverage (% of employees)

76

73

7071

70 70

6867

65

63 6363

57

5556

5554

53 5354 54

5251

65

50

55

60

65

70

75

80

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

%

West East

Source: WSI, Statistisches Taschenbuch

A recent development: binding hourly minimum wages in Germany (EUR and BRL per hour)

West East

EUR BRL EUR BRL

Construction industry Minimum wage I: 11.00Minimum wage II: 13.00

25.3029.90

9.75 22.43

Roofing trade 10.80 24.79 10.80 24.79

Electrical trade 9.70 22.31 8.40 19.32

Industrial cleaningWage group 1: 8.55Wage group 6: 13.33

19.7730.66

Wage group 1: 7.00 Wage group 6: 8.88

16.120.42

Painting and varnishing trade

Unskilled workers: 9.75Skilled workers: 11.75

22.4327.03

9.75 22.43

Old-age care sector 8.50 19.55 7.50 17.25

Security services 7.95 18.29 6.53 15.02

Laundry services 7.80 17.94 6.75 15.53

Temporary agency work 7.79 17.92 6.89 15.85

Source: Bundesarbeitsministerium, as of September 2011.

Vocational training in Germany

Core of German production model in manufacturing and crafts – providing occupation - and industry - specific skills

'Dual' system combining schools and firms

Fixed-term contracts with individual companies high conversion into permanent contract

Co-managed by social partners: curriculum and examination Standardization and comparability

binding occupational profiles and compulsory examinations

Declining share of cohorts in dual apprenticeship structural change, tertiarization – changing vocational degrees

Problem: young people unable to access vocational training

German working-age population by highest qualification (ISCED-97), 2008

Source: Mikrozensus

Benefit system and active labor market policies

Dual structure:1. Unemployment insurance contributions

1. employers and employees

2. earnings-related benefits of limited duration

1. Means-tested income support, tax-funded Combined

activation policies broad range of active labor market measures in particular hiring incentives and training

Active labor market policies for job placements training schemes hiring subsidies safeguard existing jobs (subsidized short-time work)

Short-time work („Kurzarbeit“) helped manufacturing jobs to survive (only) in 2009

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Jan

. 0

8

Fe

b.

08

Ma

rch

08

Ap

r. 0

8

Ma

y 0

8

Jun

e 0

8

July

08

Au

g.

08

Se

pt.

08

Oct

. 0

8

No

v. 0

8

De

c. 0

8

Jan

. 0

9

Fe

b.

09

Ma

rch

09

Ap

r. 0

9

Ma

y 0

9

Jun

e 0

9

July

09

Au

g.

09

Se

pt.

09

Oct

. 0

9

No

v. 0

9

De

c. 0

9

Jan

. 1

0

Fe

b.

10

Ma

rch

10

Ap

r-1

0

Ma

y-1

0

Jun

e 1

0

July

10

Au

g-1

0

Se

p-1

0

Oct

10

No

v-1

0

De

c 1

0

Stock, East

Stock, West

Notifications

Source: Bundesagentur für Arbeit

2009: About 4% of all employees, 11% in manufacturing, 20% in car making, about 350.000 FTE (would be 1 PP unemployment rate)

Employees‘ contribution rates to social insurance

0%

5%

10%

15%

20%

25%1

97

0

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

old-age careunemploymentsicknessOld-age pension

Source: BMAS.

Labor costs in manufacturing (% of gross wage), 2010

  West East Total

Charges for hours worked 75.1 77.5 75.4

Remuneration for non-working days 17.4 17.2 17.5

      Vacation 10.1 9.8 10.1

      Illness 3.3 3.5 3.4

      Public holidays 4.0 3.9 4.0

Special payments 7.3 5.3 7.1

      Wealth creation 0.4 0.3 0.4

      Fixed special payments 6.9 5.0 6.7

Social insurance contribution 18.9 20.1 19.0

Occupational pension plan 5.6 2.3 5.3

Other charges related to personnel 4.3 3.9 4.3

Total 128.8 126.4 128.6

Additionally: 7.1    

Share statutory labor costs 25.9 27.7 26.0

Charges related to personnel in % of charges for hours worked 71.4 63.1 70.6

Source: IW Köln.

Structure of the working age population in Germany, 1995-2009

Occupational dualization

Business

professionals

Skilled manufacturing + office clerks

Medium- to low-skilled personal services

Less skilled blue collar workers

Employment protection

Regular (permanent) contracts: dismissal protection companies with more than 10 workers

Dismissals based on reasons urgent business reasons or malconduct no dismissal because of inferior performance

Social selection criteria (tenure, age, child support obligations) Procedural requirements (information of works council) Complex system with high legal uncertainty Workers frequently appeal against dismissal High potential costs if employer loses law case

agreements on termination severance payment

Coverage by dismissal protection in Germany, 2008

Source: GSOEP

Cases filed in labor courts (total and concerning dismissals) and share of settlement deals (1999–08)

Source: Statistisches Bundesamt

Flexible types of contracts

Fixed-term contracts Maximum duration without valid reason 24 months (3 renewals) Equal treatment and strong protection within duration of contract Mainly used as extended probationary period

Temporary agency work High external flexibility: redundant any time But still employment relationship with temporary work agency

(permanent or fixed-term on contract) No maximum duration for assignment Sectoral collective agreements significantly below wage level in

user companies, e.g. metalworking industry

Types of contract, dismissal protection and unemployment benefit coverage in Germany

Type of job Coverage by dismissal protection

Coverage by unemployment

insurance

Coverage by minimum income

support

Full-time open-ended contracts

Yes Yes yes, with means-testing

Part-time work Yes Yes

Fixed-term contracts

No, but stable duration

Yes

Temporary agency

work

Yes (if open ended) Yes

Self-employed No Voluntary

Marginal part-time workers

Yes (if open ended) No

Number of temporary agency workers in the crisis

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Actual values

6 per. Mov. Avg. (Actual values)

Source: BA, ow n calculations

employment loss and recovery of about 250,000 agency workers

Employment patterns during the crisis, change 2008/2009 in %

Manufacturing Health, social services

All establishments

Hirings -60 +3 -17

- Fixed-term jobs -66 +3 -11

- Transitions temp/perm -35 -1 -14

Termination of contract +43 -1 +6

- Voluntary quits -35 +7 -21

- Dismissals +114 -6 +40

- Non-renewal of FTC +129 -9 +15

Employment change mid-2008/mid-2009

- FTC holders -35 +2 -6

- Temp agency workers -49 +34 -38

- Empl covered by insur. -6 +1 0

Source: Christian Hohendanner, IAB Kurzbericht 14/2010.

Conclusions

Labor market institutions able to deal with the crisis Plant-level cooperation was crucial Contribution by works councils and core workforce Supported by successful government intervention

('Kurzarbeit')... ...and secondary workforce Mix of 'internal' and 'external' flexibility

suitable for German production model

Normative concerns: insider-outsider problem Need for re-regulation?

Policy lessons

1. Automatic stabilizers promoting internal flexibility1. working time flexibility

2. wage flexibility

3. short-time work

Avoid job losses in skilled core labor force

If shocks are temporary

• Second tier of employment 1. helps buffer the core (FTC, TWA)

2. volatile employment at the margin creates challenges 1. employment stability

2. social protection

3. need recalibration of protection and unemployment benefits

Werner EichhorstIZA

IZA, P.O. Box 724053072 Bonn, Germany

Phone: +49 (0) 228 - 38 94 – 531Fax: +49 (0) 228 - 38 94 180E-mail: eichhorst@iza.org

http://www.iza.org