Behind Better than Expected German Jobs Data

Germany reported today that November unemployment fell 7k instead of rising 5-10k as the market expected. This is the fifth consecutive month that the number of unemployed has fallen in Germany. It offers a stark contrast to the US jobs picture, where another net 125k are expected to have lost their jobs last month. But does it ?

There are two drivers behind German labor market developments.

The first applies strictly to today's report. There was a one-off change in methodology of calculating the unemployed totals. The German Labour Office says without this change, unemployment would have risen by 10k.

The second is a government subsidized scheme that encourages employers to cut hours but not jobs. In effect, a business pays an employee for the hours worked and these could be cut to half time. The government grants an allowance to make up the bulk of the difference. In essence, an employee can draw roughly 80% of his/her salary and work half the time.

The Labour Office says this program, which has local variations in a number of other European countries, including the Netherlands and Austria, saved 400k jobs. The latest figures we found were from Sept and they show about 1.05 mln German workers were participating in this scheme, which also gives employers a tax incentive to participate.

Prior to the onset of the crisis, Kurzarbeit, as the scheme is called, could subsidize a cut in hours for six months, but near mid-2009 the program was extended for up to 24 months until the end of the year. However, last week, the Labour and Social Affairs Minister Dr. Franz Josef Jung announced that the 24-month subsidy would be extended until June 2011. That means that it is possible for a worker that joins the scheme in June 2011 to still be subsidized until June 2013.

There are a number of benefits from the program. It socializes and shares the costs. It preserves the important relationships between employer and employees. It also help preserve aggregate demand by maintaining to a greater extent purchasing power of the employee (they can still consume even if not working full time).

The drawback of the program becomes more evident the more protracted the economic downturn and the longer it take to return to sufficient strength to boost hours worked. In addition, not all jobs may lend themselves to shorter hours or what is in effect job sharing. The skeptics will also say that this simply delays but does not solve the labor market problems. On the other hand, it shows a kind of flexibility in the labor market, while different than the flexibility of the US labor market, may produce better economic results in at least the short-term.