Germany's next export?

Thanks to a program which supplements the pay of workers whose hours have been cut due to the recession, Germany's unemployment rate is below the average of other rich, industrialized countries, the Paris-based Organization for Economic Cooperation and Development (OECD) reported this week.

In the OECD's Employment Outlook 2009, the rich country think tank praised Germany's so-called Kurzarbeit short-time work program, which it says has "cushioned the impact of the economic downturn on unemployment."

Germany's unemployment rate is 7.7 percent, well below the average 8.5 percent rate of the 30 OECD member states.

Though the bulk of the report was gloomy, estimating that 25 million jobs will be lost in the developed world job by the end of 2010, OECD secretary-general Angel Gurria said government action, like the Kurzarbeit program, could blunt the worst effects of the downturn.

"One can learn a lot from the Germans," Gurria said at a press conference in Paris on Wednesday.

Germany's latest 'hit export'

The German government has budgeted 5.1 billion euros this year on its short time work program, which currently replaces some of the lost income of over 1.4 million workers.

"The last few months suggests that the program in Germany is doing exactly what you want it to do, which is tiding over viable jobs through a temporary downturn so that you avoid running up unemployment more than is necessary," said OECD economist Paul Swaim .

Although some other countries have adopted similar schemes, the OECD report heaped praise on Germany's program, which it described as "generous" and responsible for saving nearly 500,000 jobs at a time when nearly 3.5 million Germans are currently without work.

The positive OECD response to Kurzarbeit's success led the newspaper Die Welt to dub the program Germany's latest "hit export," though economists say that short-time work may be best suited for economies like Germany's.

Can it work elsewhere?

"It really depends on how your economy is structured," said Felix Roth, an economist with the Centre for European Policy Studies (CEPS) in Brussels, who said Kurzarbeit was vital for the export-based German economy.

"It makes sense for countries that have big, healthy industries that rely on skilled workers," that experienced a temporary drop in demand due to the global recession, Roth said.

"For those industries, it's important to hold onto the set of skills that the workers have."

Economies such as Spain's, which until the crisis relied upon construction, or the United States or Britain, which rely to a much greater degree upon services, may be less well-suited for shorter working hour schemes, Roth said.

Criticism within Germany

Within Germany, Kurzarbeit has been criticized for possibly propping up companies and industries that are not competitive.

OECD economist Paul Swaim said his organization's research could find no evidence that the German program was having that effect, but said that a successful short time work program should have mechanisms to ensure that only viable firms receive support.

Swaim pointed to a similar program in The Netherlands that requires a participating company to repay the government a portion of the support their workers received if the firm lays off workers once the short time work program ends.

"The potential cost ensures that only companies that think it's worth holding onto their workforce take part in the program," Swaim said.

A weak recovery

Successful short time work programs should also have a clearly defined end date said Swaim, in order to avoid becoming a costly public subsidy that has little effect stimulating the economy.

"You don't want it to become a program without end," he said.

But the issue of timing is delicate, as it's difficult to predict at the start of an economic downturn when growth will resume. Germany's Kurzarbeit program has an announced time limit of 24 months.

While Germany appears to be on the way out of recession, CEPS economist Felix Roth warned: "The tragedy would be if it's a short recovery."

That would mean the government would spend billions safeguarding jobs that it can no longer afford to subsidize, said the OECD's Swaim.

"In that case it probably would have made more sense to have let the layoffs occur and provide those workers with retraining right away," Swaim said.

Germans might want to prepare for the worst-case scenario. The OECD report warned that "the early stages of economic recovery will be too muted to result in strong job creation," in Germany.

Author: Brett Neely

Editor: Carl Holm