Safeguarding Jobs through Labor Hoarding in Germany

As a consequence of the global financial crisis Germany has experienced the deepest slowdown of its economy since World War II. However, at least up to now the German labor market has not shown a strong reaction to the financial crisis. Given the sharp decrease in GDP the levels of employment and unemployment are still quite stable. One possible reason for the recent development is an increased level of labor hoarding, indicating that firms do not immediately adjust labor input in line with demand for their products. The paper uses both aggregate and firm-level data in order to examine the extent to which labor hoarding has contributed towards stabilizing the labor market during periods of recession. In addition, we examine the extent to which subsidized types of labor hoarding, such as short-time work, may have facilitated the retention of workers by employers. The paper shows that labor hoarding has been of certain relevance for the German labor market in times of economic slack. This is obviously true during the current crisis. Nevertheless, short-time work has also been used by firms which were not suffering significantly from an underutilization of their capacities. To avoid windfall gains the state should consider more effective targeting systems or advocate functional equivalents such as more flexibility in working time. Comment by Olaf Hübler.