It’s a Family Thing

The German Job Miracle continues in 2012: With the number of job vacancies increasing by 4 percent, there were more than a million positions to be filled. While some economic experts argue whether the German labor market is suffering from a significant talent shortage, small and medium-sized enterprises with fewer than 500 employees have been creating the labor market, accounting for 95 percent of the labor force demand.

A comparison of labor market concepts is difficult. The German labor market is diversified and quite unique in its laws and traditions. The Federal Employment Agency (Bundesagentur für Arbeit, BA) classifies the German labor market into thirteen geographical types to handle analysis of regional disparities. This article mainly refers to the so-called type Ib: labor markets in the western part of Germany with a low unemployment rate and urban surrounding. Those regional labor markets usually consist of large cities and prosperous surrounding areas with low unemployment, a small service sector, and manufacturing dominating the economic structure.[1]  Due to regional disparities, these labor market characteristics and trends cannot easily be compared to other areas or countries.

There are several reasons why Germany’s labor market has done so well, even in the worst years of massive GDP decline. The intensive usage of short-time work (STW) might be one reason, but the experts at the Institute for Employment Research (IAB) will say that companies used numerous strategies to retain their work forces, and STW was only one of them.[2] However, the opposite of improving internal flexibility would be external flexibility, which could be interpreted as a euphemism for hire and fire—another way of saying that companies exploit the labor force for their own benefit. They hire labor when they need it, and they fire labor when they do not.

In their latest paper on the employment effects of pacts for employment and competitiveness (PEC), researchers at the IAB illustrate that concessions from both bargaining partners at a company level lead to a positive labor market effect. The authors describe the PEC as follows: “Councils agree to company-specific deviations from an industry-level contract such as reduced wages or prolonged working time, in exchange for employment guarantees or investment programs to mitigate a possible decline of employment or to improve the company’s competitiveness.”[3]

However, these concessions are not free because programs have to be financed and residual costs of employees have to be paid. Several countries followed comparable strategies of internal flexibility, and they did it with varying degrees of success. What, then, is the key to Germany’s success? There is no simple, definitive answer because only a few empirical studies have been conducted. However, we know the questions to ask and the factors to consider in the analysis. First and most importantly, Germany has a unique labor market, different from the liberal economic markets. Given the high cost of training, the imminent shortage of skilled workers due to demographic change, and regulated labor laws, the external labor markets are quite static. German institutions were encouraged to support a long-term labor strategy rather than just short-term action to cope with the crisis.

In Germany, business, labor, and state cooperate to support the labor market—this is referred to as tripartism. As Strünck proposed in his paper in 2010, long-term economic corporatism leads to an increase of social and human capital.[4] Looking at the German labor market from an outside perspective, we recognize a paradoxical situation: regulation and restriction in labor increase flexibility on the company level. One might say that German small and medium-sized companies, without having the opportunity to fire or to outsource like large corporations, make a virtue out of necessity by cooperating and keeping their labor force on board. Human resources, especially the skilled labor force, are a perishable good. In times of demographic decrease when the need for highly educated workers rises, companies think twice before releasing employees while in a crisis, especially if there is a chance of the economy recovering. Then the demand rises, and they need more workers. This might lead to an advantage when times get better and recruitment of skilled and experienced workers becomes unnecessary.

Taking into account different alternative costs of recruitment and/or paying for residual values while keeping staff at the company, one has to take a close look at the economic and statutory surroundings of the labor market. On a company level, establishments were very innovative in avoiding dismissing employees. In addition, recent empirical surveys suggest that this applies to the working population in general. Even companies with an older working force were able to compete by retaining the experienced staff and keeping them up to date by retraining them. This strategy paid off because costs of firing people are high in coordinated economies like Germany.

Besides all of these incentives or needs for internal improvements of flexibility on the company level, yet another question appears: what happens if free riders take advantage of the investment other companies made in increasing and keeping internal flexibility? When asked whether he was afraid of other companies snatching his trained and skilled workers away from his company after the program, the director of a very successful medium-sized company, who invests quite a lot of money in his training program, replied “Well, I know all the owners and CEOs of the nearby companies. It is like a family thing – it is not what we do.”