This Is How Germany Is Saving Millions of Jobs and Businesses — And Why It Matters
The German government has decided on a historic policy to secure jobs and support businesses during the Covid-induced pandemic. Political leaders have decided on a simple, yet effective instrument to fight unemployment rates and insolvency. However, it is a controversial step. Let me explain.
But first, let’s take a look at how the German welfare system works for all the readers outside of Western Europe.
Let’s start with the basics:
Firstly — Germany has a strong welfare system with five social insurances. Those protect you against 1) sickness 2) accidents 3) poverty in old age (pension system) 4) lack of care in case of disability or age and 5) unemployment.
Secondly — generally speaking, every German worker pays a share of their salary to the social insurances, the other share is covered by the employer. Keep this fact in mind.
Thirdly — although these insurances alone swallow up to 20 per cent of your salary, they are highly popular among German citizens. The reason for that is you get a lot security out of it: in case you become sick, most medical services are for free — you can go to checkups, consult a doctor or get emergency surgery paying very little money. And if you get fired, you receive unemployment benefits for 12 months (if you have previously worked 24 months minimum 15 hours per week) — they make up 60 per cent of your net income.
Net income = Salary — income tax — social insurances — other taxes (like church tax or “solidarity tax”).
The income tax varies in Germany — there are six different categories and the system is quite complex.
For now — let us assume you need to subtract 35–40% of your salary to get your net income. I know, for libertarians and probably many left-leaning US citizens, this seems like a lot. And it is. Even for me who is used to the German way. When I got my first job in Berlin, I started as a public affairs trainee. I was paid 1500 Euros per month. After insurances and income tax (which was lower due to my low income), my net income was around 1100 Euros. This equals roughly 1300 US Dollars. Paying rent for a room in a flat share and buying groceries bit large chunks out of my budget, add some socializing and transportation and you will get a sense that by the end of the month, I could usually save not more than a couple of hundred Euros per month.
However, salaries grow once you are a professional for the majority of the population, so 60% of my salary nowadays allow me a humbly comfortable life. And even if I was fired from my current job, I could get by. But this is me — childless and with a full-time job. Things look differently when you have to feed a family and maybe only have one breadwinner in the family.
So what is happening now?
As you see, the German welfare system provides a lot of support and tries to keep people afloat financially, even if they have lost their job so they have energy to focus on building skills, writing applications and searching for position. Poverty, after all, robs you a lot of energy and distracts you from these crucial steps.
Beyond the insurance system I briefly sketched out, there is another scheme which is crucial during recessions and crises: short-term work — or Kurzarbeit.
Short-term work is different than furloughs, as employees are not being laid-off. It works like this: when a crisis hits or a firm loses an important client, companies which are struggling with their economic situation can issue short-term work at the Federal Employment Agency. Employers are allowed to reduce work time of their employees and adjust the salary accordingly.
Sometimes this means that employers reduce working time to 50%, but sometimes — as in the case of the Covid pandemic — the situation is grim and requires to go to 100% short-term work. In this case, employers are sent home, they keep their contracts and receive the equal amount of unemployment benefits (60% of the net income). This gives businesses the chance to save money and activate their staff as soon as the market situation looks better. At the same time — workers are prevented from unemployment and can keep spending money to keep the economy afloat.
This is what is new:
Already in March, the German government has decided to invest heavily into this scheme. The Federal Employment Agency is covering for the employer part of the social insurances during short-term work. As the workers are technically still employed, their social insurances must be covered. However, for struggling companies paying their part of the social contract can be a burden — this is why the German government stepped in during the Covid pandemic. Additionally, the government agreed that the money employees in the short-term scheme receive, shall be increased from 60% to 70% after the fourth month of short-term work, up to 80% of the net income after the seventh month. People with children receive 7% more at every stage.
The data shows that especially low-income families don’t have enough savings to live of 67% for a long time.
Let me illustrate what that means:
Germany’s median income is 2.500 Euro (2945 Dollars) per month.
Net income should be roughly 1.500 Euro (1770 Dollars) per month.
The first months you receive 60% of the net income (or 67% if you have a child), which is 900 Euro (1060 Dollars) per month (or 1005 Euro/1185 Dollars).
Considering that the vast majority of Germans do not own property and have to pay rent, gasoline and daily goods, one can imagine that things can get rough — therefore the government increased the share workers in this scheme would receive.
Generally, the short-term scheme is a scheme for, well — short-term crises.
However, the deep recession and the Covid pandemic will take longer. Therefore, the party leaders and factional leaders of the three ruling parties (Christian Democrats/Christian Social Union and the Social Democrats) have decided on Tuesday (August 25th) to prolong the scheme. Germanys’s minister of Labor, Hubertus Heil, has advocated for this option, which has been praised by many employers and labor unions.
In total, short-term work can be prolonged until December 31st 2021. The Federal Employment Agency will cover half of the social insurance costs of employers. Companies can get these costs covered entirely, if they agree to put their employees into professional training while the scheme is affecting them. The training must take a minimum of 120 hours and be directed to a specific demand.
The decision is, however, controversial, as it will likely cost 10 billion Euro. In May, 6,7 million of Germany’s 45 million workers were affected by the short-term scheme. In Germany’s car manufacturing South, half of the companies had issued for the short-term scheme in the second quarter of 2020. It is unclear, how the dynamic will evolve and how much the policy will cost.
Why does this matter?
Firstly, the sheer fact that the short-term scheme has been prolonged until the end of next year (!) tells you a lot about how grave the economic situation is and how long the recovery will take. Germany’s decision is an indicator for the international market, too. As Europe’s leading exporting country, the German economy needs markets to be available. Apparently, the government believes that the recovery will take time — brace yourself.
Secondly, it is a smart move to couple short-term work with professional training. As in many Western societies — Germany’s population is aging. The age group between 40 and 59 makes up the largest chunk of the labor body. Many of those workers suffer already from the digital skill gap — they are sometimes lacking basics. However, although the pandemic is raging, the world will not stop spinning and the recovery will increase the pace of innovation in some areas. In order to fight long-term unemployment, training will be crucial.
Thirdly, it is worth to save the less obvious. The German short-term scheme will benefit people who work in sectors that make life pleasant — culture, recreation, music and leisure. Social distancing might kill initiatives and places that served as society’s lubricant and provided a place for the community to get together. It is worth to save those businesses and bright minds, too.