Kurzarbeit: Germany’s Short-Time Work Benefit

IMF News, June 15, 2020

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Kurzarbeit is a social insurance short-time work program whereby employers reduce employees’ working hours instead of laying them off.
The COVID-19 pandemic renewed interest in short-time work programs; Kurzarbeit is widely considered the gold standard.

Government income “replacement rate” normally provides 60 percent (more for workers with children).
Mechanics: a worker receives 60 percent of pay for hours not worked, while receiving full pay for hours worked (example: a 30 percent reduction in hours implies a 10 percent salary loss).
Usual maximum duration: 6 months consecutively.
Kurzarbeit supplements private working-hour flexibility arrangements (working time accounts). Firms may use Kurzarbeit only when working time accounts are exhausted.
Employer cost-sharing: employer pays 80 percent of the total social security contributions owed on the reduced working hours.

Potential risk: excessive reliance during normal times could reduce labor market flexibility, keeping workers in jobs that eventually need to disappear and widening protection divides across the labor market.
Cost-sharing (employer social security contribution requirement) acts as a deterrent to overuse.
Parameters (including employers’ share of social security contributions) can be relaxed during serious crises to discourage mass layoffs; such cyclical adjustments balance relief during deep recessions with avoiding excessive rigidity in normal times.

Germany was the only G7 country that did not experience a fall in employment in 2009, despite a large contraction in GDP (of almost six percentage points).
Work-sharing (including Kurzarbeit) was an important factor: estimate that about a third of the reduction in working time per employee was due to Kurzarbeit, with the remainder explained by other margins (e.g., running down working-time accounts and accumulated leave).
Other contributing factors included earlier wage moderation and a high degree of specialization of manufacturing workers, making labor hoarding affordable.
Stable employment bolstered domestic demand, supported private consumption, reduced precautionary savings, and facilitated a rapid recovery.

The pandemic affects a broader range of sectors than the global financial crisis (which mainly hit manufacturing); confinement measures caused temporary business closures in many sectors.
Temporary changes to Kurzarbeit to make it more attractive:
- Replacement rate: 60 percent for the first three months; increases to 70 percent during the 4th to 6th months; further increases to 80 percent from the 7th month.
- Maximum duration extended to 21 months.
- Coverage expanded to temporary workers (about two percent of total employment).
- Employers’ social security contributions waived.
- Requirement to exhaust working-time account balances before claiming Kurzarbeit suspended.
- Eligibility threshold lowered: firms no longer need to reduce working hours for at least 30 percent of workers; threshold lowered to 10 percent.
Usage and labor-market impact (early pandemic period): from the beginning of March to the end of April, the number of workers who applied for Kurzarbeit exceeded 10 million, or about 20 percent of the labor force — a much greater number than peak applications during the global financial crisis — while unemployment increased by less than 0.4 million.

The German government’s approach in deep recessions: make Kurzarbeit more flexible, more attractive to employers, and more generous to employees, while expanding coverage across sectors and job types.
Trade-off: increased fiscal cost, but judged well worth paying to preserve jobs and incomes.
Limitations: Kurzarbeit cannot fully overcome the profound labor-market impact of the pandemic, which affects far more sectors than the global financial crisis.
Vulnerable groups: marginal employees, who disproportionately work in services and often do not make social security contributions, are not covered by Kurzarbeit and are likely to suffer the most.
Recommendation: consider alternative ways to provide income support for this vulnerable segment of the population to avoid potentially large social costs.

Source: IMF News, June 15, 2020.