Friday, August 20, 2010

Unemployment: Do the Germans Have a Better Way?

A recent article in Businessweek points out that Germany has a different approach than us on how to respond to an economic slowdown. In our country if there is not enough work to sustain a particular position fulltime the employer has the option of cutting work hours or wages, or of dismissing the worker. The worker is then eligible for about 36% of the former wages from unemployment insurance for up to 26 weeks unless extended. Germany has a policy referred to as "short-work." German companies can choose to keep workers on at a reduced schedule and the government will compensate up to 67% of the workers wages for the work hours eliminated. Does this policy work? According to the article:
"While the worst recession since World War II pushed up unemployment in the U.S. to 10.1 percent, a 27-year high, in Germany the rate fell well below 8 percent, a 17-year low....Almost half a million jobs were saved, a feat Angela Merkel recently called a ‘minor miracle’."On that basis, the German policy seems like an excellent idea. But is there a down side to this approach? The Businessweek authors seem to think there is, saying that the Germans will now have to face a period of low job growth which will slow their rate of economic recovery. I do not understand that logic. The equivalent of job growth is getting more workers off of government support and working full time. The economy is growing and unemployment is low, at least by historical standards. They should be thrilled with the situation they are in.

I think the issues are more subtle. The German system puts pressure on companies to maintain jobs during a downturn and continue them in the future. The U.S. system encourages employers to eliminate jobs and encourages them to avoid bringing them back when business picks up. This arises both from the unemployment compensation model and stock-price rewards for cutting costs. Another way to look at our end result is to consider that a smart business will emerge from a slowdown with either fewer jobs or jobs that have been dumbed down so that they can handled by lower wage workers. This is a fundamental conflict between businesses who wish to minimize employment and workers’ earnings, and the government which has to try to maximize employment and earnings.

How is this different in the German model? A German company is under pressure to maintain positions for everyone they have hired. This probably makes them very careful about who they hire and what they hire them for. That could be a concern. On the other hand, once they create a position, it will be one that they think will have to have long-term value to the organization. Will there be a tendency to upgrade positions rather than "dumb them down?" My guess is yes, and if that is the case, then I would vote for the German model.

If you can create a system in which you have fewer jobs, but they all come with living wages—you can live and eat and raise children without a government dole—then you are way ahead of a system that only seems capable of creating ever more jobs tending downward toward the minimum wage. The latter situation is what we find ourselves in today—and it is not sustainable.

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