ILPC 2027

Due to the financial crisis in 2009 economic activity in Germany decreased at a size which has not been observed since World War II. In particular export-oriented firms in manufacturing faced a shrinking demand and therefore an underutilisation of capital and labour. However, with respect to the dramatic decrease in GDP the German labour market remained to be quite robust. Compared with other countries the German labour market performed much better during the crisis and the present period of recovery. Although the German GDP went down more sharply than in G7-countries as a whole the reduction in employment and the increase in unemployment were significantly lower. The paper sheds light on the transmission of the economic crisis to the German labour market. It is of special interest to investigate how Germany, often characterised as the “sick man of Europe” – a country that served as a textbook example for an overregulated labour market, managed to achieve its “German miracle”.

To get explanations for the miracle it is necessary to refer at first to the specific features of the German labour market. We describe the effects of the crisis by using different labour market aggregates. We will also analyse to which degree the crisis hit different regions, industries, and work arrangements such as part-time work or temporary employment. As we will see internal numerical flexibility is of special relevance for the recent labour market development in Germany. Therefore we ask how this type of flexibility was achieved. As it turns out, firm specific instruments of internal flexibility have been supported by social dialogue on the company level and on the collective level. The government complemented internal measures of flexibility by providing more generous short-time work schemes to subsidise working time reductions and thereby helped securing jobs. As being the most important policy instrument in the crisis, we will analyse the conditions and the utilisation of short-time work in greater detail. This part of the paper will be based on data from the IAB Establishment Panel 2008 and 2009. In line with the reduction of working hours we also find a strong decline in labour productivity per head. In addition, labour productivity per hour decreased. This means that firms did not adjust employment in line with the decline in the demand for their products which can be seen as an indicator for labour hoarding. Therefore, we will discuss the attractiveness of internal compared to external adjustments and the rationale for labour hoarding on the firm level. At the end we will ask whether there might also be some negative side effects resulting from the strong use of internal flexibility measures. Our results shall be complemented by an analysis of the productivity of firms in 2009. For that purpose we need data from the IAB Establishment Panel 2010 that is available at the beginning of 2011.