From “Sick Man” to “Miracle”

• Date: 01 December 2012
• Author: Alexander Reisenbichler,Kimberly J. Morgan
• Published date: 01 December 2012
• DOI: 10.1177/0032329212461616
• Subject Matter: Articles

Politics & Society

40(4) 549 –579

© 2012 SAGE Publications

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DOI: 10.1177/0032329212461616

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461616PAS40410.1177/0032329212461616

Politics & SocietyReisenbichler and Morgan

1The George Washington University, Washington, DC, USA

Corresponding Author:

Alexander Reisenbichler, Department of Political Science, The George Washington University, Monroe

Hall 440 2115 G Street, NW, Washington, DC 20052, USA

Email: reisenb@gwu.edu

From “Sick Man” to

“Miracle”: Explaining

the Robustness of the

German Labor Market

During and After the

Financial Crisis 2008-09

Alexander Reisenbichler1 and Kimberly J. Morgan1

Abstract

What explains Germany’s exceptional labor market performance during the Great

Recession of 2008-09? Contrary to accounts that emphasize employment protection

legislation or government policy (i.e., short-time work), this article argues that

actions by firms—embedded in ever-changing coordinative institutional structures—

were crucial. Firms chose to keep rather than shed labor, a strategy induced by (i) a

“toolkit” of flexible labor market instruments that had evolved incrementally over

the past thirty years; (ii) wage restraint and successful internal restructuring of firms

during the past decade, which fueled an export boom before the crisis. Firms thus

had some margin for maneuver, using internal flexibility to protect their investment in

skilled workers. These and other institutional changes driven by firms reflect a process

of successful adaptation to external economic challenges, but did not fundamentally

undermine Germany’s coordinated form of capitalism. The result is not a new German

model that was purposefully designed; instead German firms slowly discovered new

ways to cope with economic challenges.

Keywords

financial crisis, labor market, unemployment, institutional change, varieties of

capitalism

550 Politics & Society 40(4)

While many of the advanced industrialized economies are still reeling from the global

economic crisis and struggle in particular with high rates of unemployment, Germany’s

labor market has been remarkably resilient. Despite experiencing the worst economic

downturn since World War II, German unemployment rates dropped to 6.6 percent in

December 2010—well below the 8.1 percent average for the Organisation for Eco-

nomic Co-operation and Development (OECD) as a whole and 9.6 percent for the

European Union. In October 2010, the number of unemployed dipped below 3 million

for the first time since 1992.1 No one forecasted this decline in unemployment in Ger-

many; for instance, both the OECD and the International Monetary Fund (IMF) had

projected stark increases in unemployment in 2008 and 2009.2 The labor market turn-

about is all the more startling given Germany’s longstanding reputation as one of the

“sick men” of Europe, plagued by sclerotic employment performance, stagnant

growth, and an inability to adopt economic reforms.3 Yet, commentators from across

the political spectrum now laud the “German miracle,” and seek to understand what

policies or practices produced these positive employment outcomes.4 Moreover, in

debates about the future of European monetary union, German leaders and commenta-

tors have used their country’s strong economic performance to make claims about the

superiority of the “German model,” arguing that decades of fiscal restraint and govern-

ment policy to reduce labor costs have delivered economic competitiveness and

employment growth that other European countries should try to emulate.

Conventional accounts would privilege either longstanding institutional

arrangements— Germany’s strict employment protection legislation, for instance—

or short-term conjunctural ones, such as specificities in the nature of the crisis . . .

aspects of the government’s response to it. Yet, none of these approaches satisfac-

torily explains Germany’s employment performance during this crisis. Certainly,

employment protections can impede some of the labor shedding that might nor-

mally occur with less strict legislation; yet such protections hardly prevented firms

from laying off workers in past economic downturns that were less severe than that

of 2008-09. And although much journalistic attention has been paid to the govern-

ment’s efforts to encourage short-time work (Kurzarbeit), whereby employees

work fewer hours and receive government subsidies for foregone wages but keep

their jobs, Kurzarbeit has been around for many decades—indeed, for most of the

twentieth century—and only partially explains the favorable labor market perfor-

mance in the recent crisis.

Instead, firms were the central protagonists in securing this positive labor market

outcome because, by and large, they chose to keep rather than shed workers. These

choices were made possible by the availability of a “toolkit” of flexible labor market

instruments that had developed incrementally over the past thirty years with the decen-

tralization and disorganization of collective bargaining. As bargaining power shifted

to firm-level negotiations between works councils and management, firms gained

greater latitude to adjust working time and compensation to the economic situation of

the firm. In 2008-09, this toolkit helped many firms cope with a severe decline in pro-

duction without engaging in massive layoffs, enabling them to instead temporarily

Reisenbichler and Morgan 551

reduce the working time and pay of workers. Firms also benefited from a decade of

wage restraint and internal restructuring that had helped restore competitiveness, fuel-

ing an export boom prior to the start of the crisis. Many firms thus had some margin

for maneuver at the start of the crisis, and used the internal flexibility mechanisms to

wait and see how the economic downturn would unfold.

This study has implications for how we should think about processes of economic

adjustment and institutional change in advanced industrialized economies. First, we

concur with a growing body of work on the way in which actions of firms—which are

embedded in larger institutional frameworks and coordinated structures—drive incre-

mental institutional changes in order to adjust to changing economic conditions while

also maintaining the coordinative nature of German capitalism from which they ben-

efit. The creation of a toolkit of internal flexibility instruments is an example par

excellence of such processes, as it emerged out of ad hoc negotiations between the

social partners and actors at the firm level, and was in no way foreseen as a way to

manage severe economic crises. The result is not a new “German model” that was

consciously designed by political or economic actors; instead German firms slowly

discovered new ways to cope with economic challenges.5 Finally, we differ with

the more pessimistic conclusions about where these institutional changes have led.

Certainly, the changes we describe have largely benefited the “core” workforce in the

form of job security, whereas the “margin” of less well-protected workers—which has

increased with the decentralization of collective bargaining and labor market reforms—

has often functioned as a buffer to protect core workers during the crisis. However,

rather than viewing a new dualized labor market equilibrium as the inevitable result of

these processes, we believe that recent developments could help to counter some of

these dualizing trends.

The German Employment Puzzle

One notable and surprising aspect of the recent economic crisis was the fact that

unemployment not only did not rise in Germany, as was widely expected, but

declined significantly. Figure 1 shows the quarterly evolution of unemployment rates

since late 2007 and reveals that at the start of the crisis German unemployment was

almost 9 percent.

Yet, as the financial crisis hit in 2008, unemployment rates in Germany steadily

dropped, even as joblessness rose in many other OECD countries.6 It is true that the

sharp recession of 2008-09 did not generate commensurate employment declines in all

OECD countries, as some countries were more affected than others.7 Still, even when

compared to a wide array of advanced industrialized states, Figure 2 shows that

Germany stands out for its exceptional performance. The United States—long seen as

an economy capable of tremendous job creation—was especially affected, with unem-

ployment rates doubling between 2007 and 2009. Although the United Kingdom was

not as severely impacted as the United States, unemployment rates have risen three

percentage points since 2007.