Insights at UBC Sauder

Werner’s Blog: helping workers during COVID-19 - what can Canada learn from Germany's short-time work model?

Posted 2020-03-18
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The COVID-19 pandemic is already causing widespread economic impacts for workers, both globally and locally in Canada. In this excerpt from his latest blog post, Werner Antweiler, Associate Professor & Chair, Strategy and Business Economics Division at UBC Sauder, discusses the lessons that Canada can learn from Germany’s successful short-time work program that saved a million German workers from economic misfortune during the 2007 – 2009 global recession, and Canada’s excellent but underutilized Work-Share program.

The coronavirus outbreak has already crashed the stock market and a recession appears unavoidable. With countries going into "lockdown" to stop the spread of the virus, the economic impact on the hospitality industry, airlines, cruise ship operators, restaurants, and many retailers has been dramatic. Many workers in affected industries will be or have been already laid off. This means serious economic hardships for many families. Many businesses may not recover from a shutdown that last weeks and possibly months. How can the worst of this hardship be averted?

Germany has had a special form of support for workers that work in businesses that experience cyclical or seasonal slowdown. It is called Kurzarbeit in German—and short-time work (STW) in English. Predecessors of Germany's modern Kurzarbeit program go back to the 1920s, and the program was expanded in the 1970s and 1980s to reach beyond the construction industry that experiences seasonal fluctuations in employment. The idea is simple: instead of laying off workers and rehiring them later, keep them employed on shorter work hours while the government kicks in money (Kurzarbeitergeld—a short-time working allowance) to make up part of the difference.

 

How exactly does this system work?

In Germany there are three categories that can trigger short-time work allowances: economic downturns (cyclical or extraordinary); seasonal variation in work; or sectoral restructuring. When employers need to cut wages by more than ten percent of monthly gross wages, they can apply for the allowance and must demonstrate that they have exhausted other options to avoid short-time working (such as granting leave days and balancing working time accounts). If an application is approved, workers will receive a short-time working allowance of 60% of the missing net wage (67% if the worker is a parent), for monthly wages that do not exceed €5,800–€6,500 (about $9,200) depending on provincial location. The allowance can be paid up to six months, but can be extended by ministerial decree to up to 12 months in specific industries and up to 24 months in cases of exceptional economic crisis.

 

Why is short-time work better than no work?

There are clear benefits of keeping people employed on short time rather than laying them off, making them receive unemployment insurance, and possibly rehiring them later. The disruption of terminating employment has negative effects on employers and employees alike. Employers may ultimately be unable to rehire skilled workers who they have trained and relied upon in the past. Employees may lose valuable skills during their unemployment spell, and they face grave economic uncertainty. If it is foreseeable that business will return to normal eventually, it makes sense to spread the remaining work among existing employees rather than terminate employment. Rather than laying off 50% of the workers, it may be more prudent to spread the remaining 50% of work among all employees, reducing their hours proportionately. Because of this feature, in Canada STW is called work-sharing. Job security through short-time work is generally considered to enhance worker productivity and loyalty to the firm. It is a public policy that allows for quick responses when needed, such as during the current coronavirus crisis.

Short-time work came to the rescue during the Great Recession during the 2007–2009 period. In Germany, nearly 56,000 businesses relied on the policy to support over one million employees during that period. As a result, Germany did not experience significant job losses during the recession, whereas countries such as the United States experienced major lob losses. Boeri et al. (2011) find convincing evidence that short-time work actually helped reduce job losses.

 

Are there any negative sides to STW programs? What's the catch?

There is moral hazard. A firm could apply for short-time work because it is financially troubled for individual rather than macroeconomic reasons. To protect against such moral hazard, a mechanism needs to discourage complete reductions in working hours and incentivize a proper transition back to full-time operation.

First, nothing comes for free. Someone has to pay for the program. In Germany, employers contribute to a social security fund that is part of the total compensation package as an employer-paid employee benefit. Before the Great Recession, employers covered about 80% of the short-time work allowances through their contributions, but the government will reimburse up to 100% of the cost if firms need to rely on short-time work for an extended period such as during a major recession.

There is another catch. People in long-term work contracts are those who most benefit from the program. People on temporary contracts often cannot benefit from the program due to the nature of their contracts.

There is yet a third catch. Short-time work can have adverse long-term effects when it prevents the efficient reallocation of labour between more and less productive firms (see Cooper et al. 2017). However, the short-term benefits of cushioning against large economic shocks tends to outweigh these long-term costs.

 

Is there an STW program in Canada?

Canada does have a version of short-time work allowance, known as Work-Sharing (WS), administered by Employment and Social Development Canada. Unfortunately, uptake during the Great Recession was rather small. At its peak in 2009-10, only 0.83% of workers benefited from the program, far fewer than in Germany. During the fiscal years 2008/09 and 2009/10, the government spent $173 million and $243 million on work-sharing benefits. By fiscal year 2012/13, when the recession was over, this had returned to just $20 million. The average work reduction during the Great Recession was about 29%, lasting for up about 40 weeks on average. It has been estimated that the program averted 25,500 layoffs at its peak in fiscal year 2009-10.

Work-Sharing in Canada is a three-party agreement involving employers, employees and Service Canada. Employees on a Work-Sharing agreement must agree to a reduced schedule of work and to share the available work over a specified period of time. The federal government has expanded the availability of the program during the COVID-19 pandemic, which makes the program available for affected businesses for a total of 76 weeks. (Details here.) The size of the work-sharing benefits are based on previous earnings. If, for example, a worker earns $500 a week, dropping to regular EI benefits would reduce income to the EI level of 55% (i.e, $275). If the worker participates in a work-sharing agreement that reduced work hours by 40%, this 40% reduction would receive the 55% EI benefit. So the worker would get 60% of $500 from the employer ($300) and $110 (55% of 40% of $500) from the government; total income drops from $500 to $410 per week instead of $275.

So if work-sharing is available in Canada, why is uptake so low? That is the mystery of it all. In 2016, a government report found that "due to the relatively small scale of the program when compared to the size of the total labour force, the ability of the program to act as an automatic stabilizer during a recession is limited". The application process made it difficult for many firms outside the manufacturing sector to take full advantage of it. Only large firms really had the resources to fully exploit the benefits of the program. This is noticeably different from Germany. So what can Canada learn from Germany? Canada's model of short-time work is already available—so it is a matter of utilization. The program needs to be refined to make it more readily available to small firms and non-manufacturing firms, and it needs to be advertised more broadly. During an economic crisis like today, relaxed admission requirements need to be introduced. Currently, the biggest obstacle may be the need to "submit and implement a recovery plan designed to return the Work-Sharing individuals to normal working hours by the end of the program." Such a recovery plan is rather hypothetical for the coronavirus crisis; things will return to normal when the crisis ends. Canada's approach in 2008/09 was on the right track but nowhere near as effective as in Germany. Canada should learn from the experience. To make short-time work effective, it needs to be used widely across all affected sectors.

 

What is Germany doing to make Kurzarbeitergeld more readily available?

Germany relaxed some of the rules that allow firms to take advantage of Kurzarbeitergeld. Normally, benefits are only available when at least one third of workers are subject to the loss of work. In response to the coronavirus crisis, since March 1, 2020 firms with only 10% of their workforce becoming subject to work shortages will be eligible. Employers are also reimbursed in full for the social security contributions they have to pay for short-time work—which means Germany's federal government is financing the program fully at this point. The new rules introduced in Germany also apply to temp-work firms.

 

What else can we do to support businesses during this crisis?

In addition to short-time work allowances for workers, businesses that struggle financially because of the coronavirus crisis can also benefit from other forms of government help: tax deferrals and credit assistance. The objective is to protect firms from insolvency.

There is also one group that can be hard hit: self-employed workers. If their work drops to zero because of the crisis, there is virtually no safety net unless they opted into paying Employment Insurance voluntarily. Self-employed workers may not know when they will be able to receive and accept orders again. In such situations, they may not be able to obtain commercial loans to bridge the gap. Perhaps this group of persons needs access to government-backed loans to cover their living expenses for a limited duration.