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.”

[1] Wolfgang Dauth, Franziska Hirschenauer, and Felix Rüb, „Neue Typisierung regionaler Arbeitsmärkte: Damit Äpfel nicht mit Birnen verglichen werden,“ IAB-Kurzbericht, 15/2008 (Nürnberg, 2008).  See also:

[2] Lutz Bellmann and Hans-Dieter Gerner, „Company-level pacts for employment in the global crisis 2008/2009 * first evidence from representative German establishment-level panel data,“ The International Journal of Human Resource Management, Vol. 23, No. 16 (2012): 3375-96.

[3] Ibid.

[4] Christoph Strünck, „Global denken, lokal handeln: Die Aufgaben der regionalen Arbeitgeberverbände“ in Die Wirtschafts- und Arbeitgeberverbände in Politik und Gesellschaft der Bundesrepublik Deutschland, ed. Wolfgang Schroeder and Bernhard Wessels (Wiesbaden: VS Verlag für Sozialwissenschaften, 2010).

  • Chris

    In purely rational economic terms, whenever there is an imbalance between supply and demand (as here, where there apparently is a demand for more workers, but insufficient supply), it is the PRICE which is not in balance.
    Either employers are not offering enough, or workers are demanding too much (which is easy to see given the distortions unemployment comp, etc introduces here).

    This has been played out MANY times before, starting as early as the early 1960s:
    The claim that Germany was suffering a labor shortage, and thus had to import “guest workers” is basically false, really a pernicious lie:

    What really happened is that employers were unwilling to increase the amount of compensation that would have been needed to bring more workers into the labor force (just compare the structure of the labor force back then in Germany to the one found there today, or esp. here in the US, in terms of composition and breadth).

    Had they done so, no imports of workers would have been needed, and a bunch of other issues would look quite different today.
    The “Montankrise”, with the horrendous subsidies going to coal and already ruinous back then, leading to the slow wind-down of 100,000s of jobs was already in place at that same time. All of those most heavily state-funded jobs could have, and should have been let to find employment where it was really needed, instead of being filled by imported labor.
    These montan-workers were no less skilled than the imports from southern Italy, Greece, the Balkans, Turkey, so training is not an argument.

    Today of course this is much worse, because at least back then, the fictitious labor shortage was in an officially low unemployment environment, however today, this “shortage” exists in a high unemployment context, proving even more the distortions of the market, due to the myriad of labor laws in place for many decades.

    • Carsten

      thank you very much for your comment. It is true, that the price plays a very important role in this discussion. So the question might be: Is there a shortage of skilled workers or is there a shortage of *cheap* skilled workers? In my short commentary I just wanted to mention, that there is a discussion in Germany about a skills shortage, too. If you are interested in the discussion about skills shortage in Germany, I can recommend you to follow the academia dispute between Karl Brenke of the DIW (German Institute for Economic Research) and Oliver Koppel of the iw (Cologne Institute of Economic Research).