1. The Use of Flexible Measures to Cope with Economic
Crises in Germany
Werner Eichhorst, Institute for the Study of Labor (IZA)

2. 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

3. 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

4. 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

5. Performance of the German labor market during the
crisis (IAB data)
2008 2009 2010
2011
(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

6. Patterns of flexibility in European countries
Source: Eichhorst/Marx/Tobsch 2009.

7. 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

8. Internal flexibility
Most advanced sytem of internal flexiblity
at company level
1. Working time flexibility
1. 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

9. Bargaining coverage (% of employees)
76
73
70
71
70 70
68
67
65
63 6363
57
55
56
55
54
53 53
54 54
52
51
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

10. 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: 11.00
Minimum wage II: 13.00
25.30
29.90
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 cleaning
Wage group 1: 8.55
Wage group 6: 13.33
19.77
30.66
Wage group 1: 7.00
Wage group 6: 8.88
16.1
20.42
Painting and varnishing
trade
Unskilled workers: 9.75
Skilled workers: 11.75
22.43
27.03
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.

11. 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

12. German working-age population by highest
qualification (ISCED-97), 2008
Source: Mikrozensus

13. 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)

14. 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.08
Feb.08
March08
Apr.08
May08
June08
July08
Aug.08
Sept.08
Oct.08
Nov.08
Dec.08
Jan.09
Feb.09
March09
Apr.09
May09
June09
July09
Aug.09
Sept.09
Oct.09
Nov.09
Dec.09
Jan.10
Feb.10
March10
Apr-10
May-10
June10
July10
Aug-10
Sep-10
Oct10
Nov-10
Dec10
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)

15. Employees‘ contribution rates to social insurance
0%
5%
10%
15%
20%
25%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
old-age care
unemployment
sickness
Old-age pension
Source: BMAS.

16. 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.

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

18. Occupational dualization
Business
professionals
Skilled
manufacturing +
office clerks
Medium- to low-
skilled personal
services
Less skilled blue
collar workers

19. 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

20. Coverage by dismissal protection in Germany, 2008
Source: GSOEP

21. Cases filed in labor courts (total and concerning
dismissals) and share of settlement deals (1999–08)
Source: Statistisches Bundesamt

22. 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

23. 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

24. 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

25. 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.

26. 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?

27. Policy lessons
1. Automatic stabilizers promoting internal flexibility
1. 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

28. Werner Eichhorst
IZA
IZA, P.O. Box 7240
53072 Bonn, Germany
Phone: +49 (0) 228 - 38 94 – 531
Fax: +49 (0) 228 - 38 94 180
E-mail: eichhorst@iza.org
http://www.iza.org