German short-time work cushions unemployment rate

The number of people out of work grew at a slower pace in June as Germany gradually recovers from the coronavirus blow. The latest figures allay fears of mass layoffs, but it may be too soon to rejoice.

The jobless rate in Germany only rose marginally in June, official data showed on Wednesday, signaling that the European economic powerhouse's labor market may well have seen the back of the worst slump in decades.

The unemployment rate rose by 0.1% to 6.4% in June from the previous month, according to the country's federal labor agency. An additional 69,000 people were out of work in seasonally adjusted terms, taking the total number of people out of work to 2.943 million.

"The labor market remains under pressure from the coronavirus pandemic," the agency's head, Detlef Scheele, said.

Germany's ifo research institute said it expected gross domestic product (GDP) to grow 6.9% in the third quarter and 3.8% in the last quarter of the year, following a contraction of 11.9% in the second quarter when compared with the January-March period.

The country has seen a relatively small uptick in total unemployment thanks to its "kurzarbeit" wage subsidy scheme despite a massive economic blow dealt by the coronavirus pandemic. The unemployment rate was around 5% before the pandemic.

Germany's "kurzarbeit" or short-time work program, a scheme dating back to the early 20th century, allows companies facing economic distress to reduce working hours of their employees instead of firing them. The German government then provides workers with an allowance to partly make up for the reduced wages.

A record 10 million workers were put on the scheme in March and April, when the economy had virtually come to a standstill.

Many of them have since returned to work and the labor agency said "the massive use of the scheme has stabilized."

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The wage subsidy policy was hailed for 'miraculously' keeping unemployment in check during the 2008-09 global financial crisis. Thanks to the scheme, the unemployment rate in Germany only grew marginally in 2009 even as the GDP fell by 5.6%. The scheme — which covered around 1.4 million workers at its peak — ensured that firms could hold onto their skilled workers and immediately deploy them when the recovery began.

The German job retention scheme has now been imported by its eurozone peers as they also seek to rein in the carnage unleashed by the coronavirus on the job markets. Capital Economics estimates almost 50 million workers, or 28% of the workforce, have been on short-term work in the euro area.

The policy has served them well so far. The jobless rate only inched up to 7.3% in April from 7.2% before the pandemic, a tiny hit when compared with the 25% drop in GDP between February and April, according to the research firm.

Key differences

But Jessica Hinds of Capital Economics says the wage subsidy scheme may not be able to prove to be as effective as it did in 2008-09. She points that more workers are on fixed-term or temporary contracts today, and risk losing their jobs when those expire.

And while during the financial crisis German companies were eager to retain their highly trained workers, it may not be the same with retail and hospitality companies — which are among the worst-hit — with lower-skilled staff, she said.

With the current crisis much more severe, albeit shorter-lived, than the financial crisis, governments with high debts such as Italy may not been too keen to carry on with the scheme for long.

"As a result, while short-time working schemes will go a long way to cushioning the blow to the labor market, they will not be able to prevent a significantnumber of job losses," she said in a note to clients.

Economists at Germany's Allianz estimate that 9 millionworkers or 20% of those currently enrolled in short-time work schemes face an "elevated risk" of losing their jobs in 2021 because of the slow recovery in sectors like retail, travel, hospitality and entertainment.

"We call these zombie jobs; they require ad hoc policies to avoid postponed mass unemployment," they said in a note.