Explaining the German Employment Miracle in the Great Recession – The Crucial Role of Temporary Working Time Reductions

This paper investigates the reasons for the exceptionally robust performance of the German labour market during the Great Recession. While GDP dropped by more than five per cent in 2009, employment remained constant and started to increase soon after. We compare this recession to other major recessions in Germany and analyse to what extent changes in hourly productivity and working time cushioned their impact on employment. We find that reductions in hourly productivity played a significant role in all recessions while working time reductions helped to safeguard jobs only occasionally. However, in the Great Recession, temporary working time reductions were amply used to stabilise employment. Using a time series model, we show that the reduction in hourly productivity during the Great Recession is predictable with historical data, while the reduction in working time was unexpectedly pronounced. Using detailed information on instruments for the adjustment of working hours, we show that new instruments which have been established in the decade before the Great Recession have been heavily used to reduce working time in the Great Recession. We argue that the development of these instruments was only possible within the framework of corporatist industrial relations.