Short-Time Work

The reaction of the German labor market to the worst global recession in postwar history was relatively mild. It has so far not translated into a significant employment decline. Quite the contrary, the size of the German working population remained at a record level of more than 40 million people through both 2008 and 2009. Short-time work certainly made a substantial contribution to this astonishing development. The instrument helped significantly to cushion layoffs by extending subsidies for a temporary reduction in working hours. A recent study by IZA Director Klaus F. Zimmermann, IZA Research Associate Ulf Rinne and Karl Brenke (DIW Berlin) analyzes how short-time work has developed and where in the economy it is especially common, in particular during the latest economic crisis. Short-time work was, and is, especially common in Germany’s industrial sectors which rely heavily on exports as well as those service sectors closely linked to industrial production. At the end of 2009 one in six employees with jobs subject to social security contributions and employed in machine construction and metal production worked reduced hours; in the automobile industry it was one in seven. As the number of short-time workers declines, the proportion of those who had long since had their regular working hours reduced is growing. Therefore, the indications are that a base of long-term short-time workers is developing.

A look back in history
The origins of a specified payment made to employees in the case of short-time work can be dated to the beginning of the last century. The precursor was a law on amendments to tobacco tax in 1909, as a rise in tolls and taxes would mean less work in the tobacco processing plants. After World War I, short-time work was integrated into the newly created unemployment benefit scheme in all sectors of the industry. Short-time work was deployed on a massive scale during the f irst economic crisis of the Weimar Republic. By the time the world economic crisis peaked in 1932, the share of short-time workers had increased to more than 20 percent.

Regulations governing short-time work during the time of the Weimar Republic were broadly adopted by the Federal Republic. Short-time work was again deployed on a large scale in the second half of the 1960s, which witnessed the first post-war economic crisis. After little over a year, however, short-time work had once again disappeared and unemployment had greatly declined. Another vigorous rise in short-time work in the middle of the 1970s and the first half of the 1980s resulted from the oil and energy crises.

German reunification presented a special case. Following the monetary, economic and social union, production in the former German Democratic Republic collapsed at lightning speed, and underemployment drastically increased. Initially, the response was predominantly the deployment of short-time work. In the beginning of 1991, more than a quarter of all employees in East Germany were in short-time work. The reduction in working hours was often as much as 100 percent. On the one hand, the wish was to retain the workforce because it frequently represented the intrinsic essence of the firms, with a view to privatization; on the other hand, the soaring rise in unemployment was supposed to be kept in check. This backdrop, therefore, meant that short-time work was widely used, since time was needed to conceive, then introduce, other labor market policy instruments to create jobs, and encourage further education and retraining. As these became available, the number of short-time workers in East Germany drastically declined. Hence, short-time work at that time did not serve as an instrument to bridge a temporary production gap but as first aid to help cushion the social shock of the economic upheaval.

A short while later, following the end of the reunification boom, the number of short-time workers once again increased – this time, however, primarily in West Germany. In the two periods of economic downturn which were to follow (1996/1997 and 2001/2004), short-time work, in contrast, increased relatively little although unemployment rose steeply.

Short-time work during the crisis
Even so, in the recent economic crisis short-time work was applied more extensively than ever before in the history of the German Federal Republic following the upheaval of reunification. Amendments to laws and regulations certainly made a substantial contribution. The number of short-time workers drastically increased from October 2008 and peaked in the second quarter of 2009. In May 2009 more than 1.5 million employees received the short-time work allowance due to economic reasons. In December, the month for which there is the most recent data, this figure still stood at more than 800,000. The question how much of the reduction in short-time work can be attributed to dismissals or a reduction of work capacity within the company cannot be answered due to the scarcity of information. Unemployment would have undoubtedly risen much more steeply – in absolute terms around twice as much as it actually had grown from the middle of last year. In addition to the decrease in the number of short-time workers, the actual figures regarding the development of employment and unemployment also indicate more of a loosening rather than a tightening of the labor market.

Short-time work is clearly one of the key reasons why the Germany labor market has remained largely unaffected by the massive drop in production that has hit the economy in the spring of 2008. In other industrial countries the impact of the crisis was much stronger: In the United States or Spain, for instance, unemployment more than doubled while the German rate remained nearly constant.

Manufacturing particularly affected
With regard to different sectors, there are also large differences in the extent of short-time work as a consequence of the recession. While before the economic crisis short-time work could also be found to a considerable degree in the construction industry, the main emphasis shifted to the manufacturing sector during the course of the crisis. In the middle of 2009, this sector accounted for four-fifths of short-time workers. However, not only did f irms in manufacturing determine the rise of short-time work, they also governed its fall. The development of short-time work in other sectors generally proceeded less dynamically.

Nonetheless, the effect of short-time work on this sector has been far greater. The reason for this was that the crisis in Germany had so far been felt mainly in the form of a drastic decrease in foreign demand, and the export industry is driven in particular by firms in the manufacturing sector. At the end of 2009, one in ten employees subject to social security contributions were receiving short-time work allowance due to a reduction of working hours in light of the economic situation. This proportion was much lower in every other sector.

A survey of the individual sectors reveals a more diverse picture: short-time work was widespread within the manufacturing sector, in particular in engineering, metal construction and car manufacturing – all of which are export-oriented industries. The same goes for textile manufacturing. In comparison, short-time work was used less extensively in sectors which cater more for the domestic market. Thus, the share of short-time work in the food industry was a mere 0.3 percent at the end of last year. Furthermore, not every export-oriented industry had to extensively adopt short-time work. One example is the pharmaceutical industry, whose turnover is generally less dependent on fluctuations in the world economy: this sector’s rate of short-time work was 0.8 percent.

A relatively large number of short-time workers are to be found in areas of the service sector in which a considerable share of the activity is of an industrial nature − such as the transport sector and wholesale trade, engineering services, advertising and temporary employment agencies. Others sectors also include IT services and consulting. There are, however, sectors in the service industry in which there is no discernible reason for the reduction in work hours. They should not have been affected, either directly or indirectly, by the weak foreign demand. Some of them, such as retail trade, hotels and restaurants, and travel agencies, are geared towards domestic consumption; and domestic demand in Germany had remained stabile despite the economic crisis. In the construction sector, the extent of short-time work supposedly put down to the economic circumstances is surprisingly high, even though production in this sector increased significantly from the middle of 2009 and a seasonal short-time allowance for loss of working hours due to weather conditions is available. Other sectors of the economy, such as public administration, education and teaching, as well as health care and social services, are by and large not sensitive to economic circumstances – nevertheless, short-time workers can also be found here. It may be that these sectors have resorted to short-time work not because of economic circumstances but more because of internal difficulties or structural problems.

Prolonged short-time work
The average loss of hours for each short-time worker has changed little since the middle of 2009; in the past this average had risen significantly during the expansion phase of short-time work. In December 2009, 60 percent of short-time workers had working hours reduced by up to a quarter of their contractual obligation. As few as one in ten had their normal working hours reduced by more than a half. The average loss of hours amounted to nearly 30 percent. Since 3 percent of all employees subject to social security contributions were involved in short-time work at the end of 2009, the reduction of their working hours accounts for less than 1 percent of the contractually obligated work volume.

Whilst the total number of short-time workers fell, the share of employees who had experienced a loss of hours over a prolonged period of time rose considerably. By the end of 2009 three quarters of short-time workers (more than 600,000) had been working short-time for more than six months, 85,000 for even more than a year. The structure of these time periods indicates that it is leading to a structural hardening and the establishing of a base of long-term short-time workers. This form of long-term unemployment is predominantly found in manufacturing, especially in the metal sector such as engineering and the automobile industry.

Consequences and policy responses
Short-time work is an instrument which can be utilized by firms to react flexibly to changing economic circumstances. In periods in which the economy is struggling, the social blow of lost working hours can be cushioned; and when the situation improves, the necessary personnel are immediately available. It was therefore right to make the regulations governing short-time work more attractive to those affected by the crisis. In this manner, a rise in unemployment was prevented. The vigorous adoption of the short-time work regulations during the crisis is proof of the success of this policy.

It must be kept in mind, however, that short-time work only represents an instrument for the temporary stabilization of the labor market: in the medium term, negative effects can also appear. Hence, firms could be tempted by the possibility of longer implementation of short-time work to neglect the necessary efforts for improvement: in particular, improvements in competitiveness and focusing on new market conditions which also require adjustments to the structure and scope of the personnel. Therefore, policymakers should be contemplating an early exit out of the current rules governing short-time work.

The discussion, however, has mainly concentrated on conflicting suggestions: instead of considering possible scenarios for a phasing out of short-time work, politicians are currently considering the idea of once again increasing the eligibility period for the short-time work allowance. Furthermore, social security contributions for short-time work are not to be paid by the employers from the beginning of 2011, as was planned, but will continue to be reimbursed by the Federal Employment Agency. Collective wage bargaining agreements, which, in the case of short-time work over a longer period, both parties can bear a greater portion of the costs than before, are possibly more efficient than these legal specifications. In this way, incentives to refrain from making the necessary structural adjustments can be avoided.

There is the danger with all forms of state intervention associated with cash benefits or other instruments (such as transfer payments, tax breaks or subsidies) that they are open to abuse or lead to deadweight losses. This also seems to be the case with short-time work. Thus, short-time workers are also to be found in sectors not confronted with a loss of working hours primarily due to economic conditions. A narrower interpretation and a consistent application of the laws, together with tighter controls, could overcome some shortcomings. With this in mind, an institutionalizing of the extension period for short-time work is unadvisable, as misapplication can never be completely avoided.

Wochenbericht des DIW Berlin 16/2010, 2-13
Kurzarbeit: Nützlich in der Krise, aber nun den Ausstieg einleiten
Karl Brenke
Ulf Rinne
Klaus F. Zimmermann