Flexible work plans save employment in Europe

Europe has seen strong declines in GDP this year but there has not been the same increase in unemployment as in the US. So what are they doing differently? EU countries have all increased fiscal stimulus albeit not as much as would have been liked by the US. What they have been aggressive at implementing have been short-time work programs.

Workers can be kept on for reduced hours with the government providing support for the business as well as the workers. This allows for flexible wages on a temporary basis as cuts the cost for employers to hold onto workers. For example, Germany has enhanced its short-time program during this recession to provide more business and worker relief.

Key features of the German Kurzarbeitergeld programme from RBS -

To claim short-time benefit, employers have to present an application to the local Employment Agency proving that business conditions require a minimum 10% wage reduction, for any number of employees. Once allowances are granted the employment agency will reimburse 60% of the wage cut to the companies (67% for employee with children). The government will also compensate for some or all of the employers’’ social insurance contributions. The employees interested will not be made redundant but instead will work for a reduced number of hours (there is a lot of flexibility in the way effective numbers of hours worked can be modulated at the firm level).

This program could have worked in the US to protect some of the downside from the recession. Of course, there has been voluntary wage reductions and part-time work by many firms, but there is no relief for the business from the the taxes. This form of government business partnership could be an effective tool for many countries. The unemployment levels are distorted when comparisons are made between the US and the EU, but these types of policies can show that basics labor market principles can be applied in innovative ways to help an economy.