The encyclopedia · Strategy & Leadership · Strategic decision · 2009
Germany paid firms to cut hours, not workers, in downturn
Germany's Federal Employment Agency paid firms to cut hours instead of workers, preserving skills through the 2009 crisis.
German Federal Employment Agency
the move
In a typical recession, a firm facing collapsed demand cuts headcount to survive — the standard adjustment, and the one most economies default to. That approach carries a hidden cost beyond the immediate hit to laid-off workers: firm-specific skills and working relationships built over years disappear the moment someone is let go, and rebuilding that capability once demand recovers means recruiting and retraining from scratch, a slow process that can leave a firm unable to respond quickly even when the economy turns around.
Germany's Kurzarbeit ("short-time work") scheme, a century-old instrument, let firms facing a temporary, economically-driven drop in demand cut employees' working hours instead of cutting employees. When the global financial crisis hit in 2008-2009, Germany's GDP fell by 6.9% in the fourth quarter of 2009 alone — one of the sharpest contractions among OECD economies — while its unemployment rate barely moved, a divergence from every other major economy in the crisis that drew sustained attention from economists trying to explain it.
why it works
- Subsidizing idle hours keeps the employment relationship intact, so firm-specific skills are not lost.
- Workers stay attached to the firm, so when demand recovers, full production can resume immediately without recruiting or retraining.
- The state pays for idle capacity upfront, which is cheaper than paying unemployment benefits and later bearing the cost of rehiring and retraining.
what transfers
When demand drops, subsidize reduced hours for the whole team rather than laying off part of it; preserving trained relationships is often cheaper than rebuilding them.
what came after
Kurzarbeit peaked at 1.5M workers in the 2009 crisis, saving an estimated 500,000 jobs, then covered 7.3M in May 2020 alone. German Chancellor Angela Merkel credited Kurzarbeit directly for preventing far larger job losses during the 2008-2009 crisis, and the scheme was scaled up even further and used as a template by other countries — the UK, Denmark, and others introduced comparable job-retention schemes — during the 2020 COVID-19 recession, when German enrollment reached an unprecedented 7.3 million workers in a single month.
references
- Germany's short-time work scheme: can its past success be replicated?
- Coronavirus: 7.3 million Germans put on short-time work scheme in May
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