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Why Germany's Unemployment Rate Is Lower

6:46 PM, Aug 31, 2010 • By MICHAEL WARREN
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Robert Barro's Wall Street Journal op-ed from Monday convincingly argues that unemployment benefits won't help the economy and won't improve unemployment levels. Here's a sample:

The administration has argued that the more generous unemployment-insurance program could not have had much impact on the unemployment rate because the recession is so severe that jobs are unavailable for many people. This perspective is odd on its face because, even at the worst of the downturn, the U.S. labor market featured a tremendous amount of turnover in the form of large numbers of persons hired and separated every month.

For example, the Bureau of Labor Statistics reports that, near the worst of the recession in March 2009, 3.9 million people were hired and 4.7 million were separated from jobs. This net loss of 800,000 jobs in one month indicates a very weak economy -- but nevertheless one in which 3.9 million people were hired. A program that reduced incentives for people to search for and accept jobs could surely matter a lot here.

While the American labor force struggles with nearly 10 percent unemployment, Germany's most recent figure of 7.6 percent unemployment signals more good news for the largest economy in Europe:

The German unemployment rate was stable in August at 7.6 percent of the workforce, official figures showed on Tuesday as the number of people seeking work edged slightly lower to 3.188 million people.

"The clear rebound of the German economy continues to translate positively onto the jobs market," a labour agency statement said.

As Fred Barnes noted last night on Special Report, Germany has become model for what's working to stave off a labor market crisis. The economy is seeing some of the best growth numbers in two decades, supported largely by increased exports. But it's been the German labor policy of Kurzarbeit that's getting the most credit for the drop in unemployment.

It is better to have something than nothing at all. Validating this view, Germany's short-term working allowance scheme called Kurzarbeit successfully supported the labor market during tough times. Work sharing schemes exist in several economies, but the German one has been touted the most successful.

Under Kurzarbeit, the German government compensates as much as 67% of the foregone net wages of an employee, if the employer needs to cut wage cost and working times amid economic slowdown. When an employee is covered under this scheme, his/her social contributions such as pensions, health care, longtime care, jobless benefits are fully met by the Federal Employment Agency.

Further, if there is no work for an employee, he/she has to undergo training and skill development, costs of which are borne by the agency. Such training and development could come in handy at times of booming business. Temporary workers are also eligible for the scheme.

This sort of employment policy serves as an alternative to cutting jobs. The advantage to employers is that they can retain their trained staff during periods of economic slowdown as the government meets the salary cost. Employers can also avoid the cost of rehiring once the economic situation improves.  

It's far from perfect policy in the long run. Germany can't subsidize too many jobs for too long. Job subsidies can inflate the opportunity costs of retraining for work in a different industry, and behaviors will change, causing the market to adjust to less than optimal productivity levels.

But in the short run, the policy seems to have worked for Germany. It makes more sense for the government to spend money on workers that are working less than to spend it on workers that are not working at all. The concurrent growth of the economy means Germany may not have to borrow as much future wealth to cover the resulting budget deficit. That deficit has been lessened now that the government has hedged on the Keynesian spending policies President Obama impressed upon Europe in favor of reducing spending by over $95 billion.

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