Covid-19 cracking Germany’s defense against unemployment surge

Two months after Germany’s economy minister pledged to do everything so “no job” would be lost to the pandemic, unemployment has already raised more than during the entire 2008/2009 financial crisis.

The emerging tensions in Europe’s most significant labour market show that even countries with well-established safety nets struggle to shield workers. State-wage support couldn’t prevent a jump in unemployment of 373,000 in April. And while a large part of that can be explained by people registering as jobless instead of entering training programs, economists are concerned about more trouble ahead.

A significant risk is that temporary furloughs through the famous Kurzarbeit can only delay some job losses. With the economy set to hurt for a long time, many businesses remain at risk, and the coronavirus is testing the limits of a policy relying on a quick rebound. A rise in unemployment puts the economy in a potentially vicious cycle: Weaker consumer demand, a further delay to the recovery and another blow to businesses such as retailers and restaurants.

“Short-time work subsidies are only suitable for temporarily bridging lost work and earnings,” said Martin Mueller, an economist. He focuses on the German labour market at the state-owned KfW bank. “If the restrictions last too long, many short-time workers are likely to become unemployed.”

State-wage support in Germany dates back to 1910 and has historically focused on preserving manufacturing jobs. In 1924, a quarter of the workforce was enrolled in a program similar to today.

While the scheme proved successful a decade ago when credit dried up, and factories suffered from collapsing orders, a full shutdown of public life to prevent the spread of Covid-19 has primarily hit services.

Restaurants, hotels, and retail stores have born the brunt of more than two months of restrictions.

Restaurant chain Vapiano filed for insolvency in early April, and athletic wear shop Runners Point, a subsidiary of Foot Locker, is closing down. A study by research firm Crif Buergel estimates as many as 29,000 companies will go out of business this year.

Almost one in five companies surveyed by the Ifo Institute decided to reduce staff in April. At least half of all restaurants and hotels indicated they slashed jobs.

“No healthy company should go bankrupt because of the corona, and no job should be lost.”

German Economy Minister Peter Altmaier on March 13

KfW’s Mueller estimates unemployment will rise to about 3 million in 2020, an increase of some 800,000 from last year’s trough. The IAB research arm of the labour agency has a similar forecast. It also predicts a decline in the number of employed people by about 1 million.

That includes hundreds of thousands of so-called “mini jobbers”: part-time workers who are particularly prevalent in services, receive a monthly salary of no more than 450 euros ($490), and aren’t eligible for the reduced-work subsidies. They are also unlikely to appear in official jobless numbers many are pensioners, students, or homemakers who don’t usually register as unemployed.

Germany, where some 6 million workers received state-wage support in April, isn’t the only country where furlough schemes appear to be showing cracks.

In Austria, a quickly revised program failed to prevent unemployment in sectors more used to hiring and firing and to seasonal employment, according to Helmut Mahringer, a labour-market economist at research institute Wifo. Joblessness has surged by 200,000 since the end of February, with 1.3 million workers on state-wage support.

In Spain, close to 1 million employees nearly a quarter of those temporarily suspended from their jobs are still waiting for their payments, according to a study.

Last month, Germany raised the amount it pays workers whose hours have been cut by more than half. Services-sector union Ver.di charged that those raises don’t kick in until four months into leave, and don’t address the conflicts of low-income or part-time staff.

That won’t stop businesses from using the scheme, according to Enzo Weber, who leads IAB’s forecast and economic analysis division.

“Companies have so far made much greater use of short-time work policies than layoffs,” he said in a phone interview. But “we see the worst economic shock since World War II, and it’s clear that despite short-time work policies it will lead to a significant number of removals.”