Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How Germany's Kurzarbeit Saved Jobs During the Pandemic
Transcript
- Lucas: So, Luna, I keep coming back to this one German policy that I think quietly saved millions of jobs during the worst of the pandemic, and it's called Kurzarbeit. It's short-time work, and it's not new, but its scale in 2020 was just staggering. Lucas: At its peak, around six million German workers were on Kurzarbeit, which is roughly 15 percent of the workforce. And yet, the unemployment rate barely moved. Compare that to the U.S. where job losses were brutal and recovery was slower. Luna: I've heard of Kurzarbeit, but I feel like most people outside Germany don't really get how it works or why it's such a big deal. So what's the actual mechanism? Lucas: Right, so the basic idea is that when a company hits a temporary downturn, instead of laying people off, they cut everyone's hours. The government steps in and pays a chunk of the lost wages, usually around 60 to 67 percent of the shortfall, depending on if you have kids. Lucas: The company keeps the worker on the books, keeps their health insurance and pension contributions flowing, and the employee keeps their skills and their job. When things pick up, they just ramp back up to full hours. No rehiring, no retraining, no disruption. Luna: So it's basically a wage subsidy to keep people attached to their jobs. But doesn't that create a problem where people stay in jobs that are no longer viable? Like, zombie companies? Lucas: That's the classic critique, and it's a fair one. In a normal recession, you want some creative destruction, you want resources to move to more productive uses. But Kurzarbeit is designed for temporary shocks, and it has strict limits. It's capped at 12 months, though during COVID they extended it to 24. Lucas: And the idea is that if you have a sudden demand shock, like a pandemic, you don't want to sever all those human capital ties, because you'll just have to rebuild them later. It's a form of insurance for skills. Luna: But how did it actually perform? I remember hearing that Germany's unemployment rate went up less than a point in 2020, which seems almost unbelievable given the GDP contraction. Lucas: Exactly, that's the headline number. In 2020, German GDP fell by about 4.6 percent, but unemployment only rose from around 5 percent to 5.9 percent. Meanwhile, in the U.S., GDP fell by a similar amount, but unemployment spiked to nearly 15 percent. Lucas: The U.S. did have the CARES Act and enhanced unemployment benefits, but those were checks, not a systematic job retention program. Kurzarbeit is built into the German labor market infrastructure, so it was ready to go from day one. Luna: Was it always that smooth? I mean, the program has been around since the 1920s, right? So there's a lot of history there. Lucas: Yeah, it actually goes back to the Weimar Republic, but the modern version was really refined after the 2008 financial crisis. That's when Germany used it heavily to keep people attached through the Great Recession, and it was credited with keeping unemployment from spiking. Lucas: And the economist Michael Burda at Humboldt University has studied this a lot. He calls it a 'labor hoarding' strategy, and he argues that it's a rational response to uncertainty. When you don't know if the shutdown is temporary or permanent, it's cheaper to keep your workforce intact than to lay them off and then rehire. Luna: So it's like an option value argument. You're paying a premium to keep the option of quickly ramping back up. Lucas: Precisely. And the productivity angle is interesting because you might think, okay, you're paying people to work less, so productivity per hour must fall. But actually, studies of the 2008 crisis found that firms using Kurzarbeit had better productivity outcomes afterward. Lucas: They retained their most experienced workers, they avoided the disruption of turnover, and they could invest in training during the slow period. Some firms used the downtime to upskill their teams, which paid off when demand returned. Luna: But wait, there's a downside too, isn't there? I've read about 'ghost workers' where people are technically employed but doing nothing. Doesn't that drag on productivity? Lucas: That's a real concern. In 2020, there were reports of workers on Kurzarbeit doing zero hours for months. The government pays them to stay home, and there's a risk that they lose touch with the workplace. There's also the risk of deadweight loss, where you're subsidizing jobs that would have stayed anyway. Lucas: But the empirical evidence suggests that in Germany, the program was fairly well targeted. The uptake was highest in sectors hit hardest, like hospitality, manufacturing, and events. And as restrictions lifted, those workers came back quickly. Luna: So how does this compare to what the UK did with the furlough scheme? That was similar, right? Lucas: Very similar, actually. The UK's Coronavirus Job Retention Scheme covered 80 percent of wages up to a cap, and it kept about 9 million people on payroll at its peak. The US tried something different with the Paycheck Protection Program, which was more of a loan that could be forgiven if you kept employees. Lucas: But the difference is that Kurzarbeit is a permanent part of the German social safety net. It's always there, ready to be switched on. The UK and US had to invent something from scratch, which took time and created confusion. Luna: And that speed matters, right? Because the faster you can get money out the door, the faster you can stabilize the economy. Lucas: Exactly. And that's why I think Kurzarbeit is a model worth studying even beyond crises. It's a tool for managing economic transitions, like when a region loses its main industry. Instead of a sudden shock to the labor market, you can use short-time work to smooth the adjustment. Lucas: There's a debate about whether it reduces productivity in the long run because it might keep workers in declining industries. But the counterargument is that it gives workers and firms time to adapt, to retrain, and to find new opportunities without the scarring effect of unemployment. Luna: Scarring is a big deal. Long-term unemployment can permanently harm a worker's earnings and even health. So if Kurzarbeit prevents that, it's a huge win for human capital. Lucas: And that's the productivity story that often gets missed. Productivity isn't just about output per hour; it's about preserving the skills and knowledge that drive long-term growth. Kurzarbeit is an investment in that. Lucas: Of course, it's not cheap. The German government spent around 40 billion euros on Kurzarbeit in 2020. But you can think of it as insurance. The alternative, mass layoffs followed by a slow recovery, might have cost more in the long run. Luna: And that's actually a really useful lens for thinking about productivity policy in general. It's not just about efficiency; it's about resilience. Lucas: Exactly. And if today gave you a new way to think about that, then it was worth the listen. You know, these episodes are ad-free, and the reason is listeners like you. If you want to keep us going, you can buy me a coffee at buy me a coffee dot com slash fexingo. Luna: Yeah, it really makes a difference, and it's a great way to show support. But back to Kurzarbeit — there's a really interesting question about whether this could work in a country with a less centralized labor market. Lucas: Right, and that's the big open question. The U.S. has a more decentralized system, with states running unemployment insurance. Could you run a national short-time work program? There have been some pilot programs, but nothing on the scale of Germany. Lucas: The politics are tricky because it involves a bigger role for government in labor markets. But given how well it seemed to work in Germany, you'd think more countries would at least try it. Luna: I think the most convincing argument is the speed of recovery. Germany's economy bounced back much faster than expected, and it's hard not to attribute some of that to keeping people attached to their jobs. Lucas: Absolutely. And there's even research suggesting that firms using Kurzarbeit were more likely to invest in automation and digitalization during the crisis, because they had the time and resources to do so. That could be a productivity boost in the long run. Lucas: So, Kurzarbeit is not just a crisis tool; it's a strategic way to manage the labor market. It's a fascinating example of how policy design can shape economic resilience. Luna: And it makes you wonder, what other policy ideas are out there that we haven't fully explored? Maybe that's a topic for another episode. Lucas: Definitely. But for now, I think the takeaway is that when we talk about productivity, we need to think beyond the factory floor. Sometimes the most productive thing you can do is keep people employed. Lucas: Thanks for listening, and we'll see you next time.