High costs of short-time working for companies

Estimates by the Institute for Employment Research show that the residual costs to be borne by companies adopting short-time working amount to 24%–35% of regular labour costs. These residual costs may increase if a collective agreement provides for a supplement to the allowance. The adoption of short-time working has so far had a favourable impact on the unemployment rate, but it may come to an end unless the volume of orders recovers in the coming months.

In August 2009, the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung, IAB) published a study on the costs and advantages of short-time working (in German, 1.26Mb PDF). The study’s findings reveal that the residual costs to be borne by companies which adopt short-time working amount to between 24% and 35% of the regular labour costs. Provisions in collective agreements that stipulate the payment of supplements to the short-time working allowance may raise the level of these residual costs. As a result, it is unlikely that short-time working can be sustained over a long period of time.

Background

Companies can apply for short-time working allowances if, for example, they experience a temporary shortfall in orders. By doing so, they can reduce both the working time and wages of their employees, thereby lowering their labour costs (DE0904039I). The affected employees receive short-time working allowances to the value of 60% of the wage cut (net of taxes) for single persons or 67% for employees with children. Although the companies initially pay these allowances, they are subsequently reimbursed by the local bodies of the Federal Employment Agency (Bundesagentur für Arbeit, BA).

Residual costs of short-time working

If an application for short-time working allowances is approved, the wages of the affected workers can be reduced to the same extent as the working time. In principle, the social security contributions due for the cut in working hours still have to be borne, at least partly, by the company. However, according to the latest amendment of the legislation on short-time working, which took effect on 1 July, the company is reimbursed by BA for half of the social security contributions if the period of short-time working is limited to a maximum of six months. If the period exceeds this threshold, the reimbursement covers 100% of the contributions.

The volume of other non-wage labour costs, such as the earnings that employees receive for days that they are on holiday, for bonuses and other additional payments, is not affected by short-time working. Therefore, total labour costs are not proportionally reduced. IAB estimates that, on average, companies still incur between 24% and 35% of their regular labour costs depending on the volume of BA’s reimbursement (see table).

Residual costs of short-time working
  Hourly wages (€) Residual costs per working hour cut – no reimbursement of social security contributions (€) Residual costs per working hour cut – 50% reimbursement of social security contributions (€) Residual costs per working hour cut – 100% reimbursement of social security contributions (€)
Regular wage 16.46      
Regular non-wage labour costs 12.15 9.98 8.40 6.82
Regular total labour costs 28.61      
Residual costs without provisions in collective agreements   13.09 9.93 6.76
As % of regular total labour costs   46% 35% 24%
Residual costs with collectively agreed supplements *   17.00 13.83  
As % of regular total labour costs   59% 48% 37%

Note: * Calculation is based on provisions in a collective agreement that secure 90% of a regular worker’s net earnings level.

Source: IAB

Provisions in collective agreements raise residual costs

Some collective agreements provide for supplements to short-time allowances that maintain net earnings at between 75% and 100% of workers’ regular wage level. For example:

  • in the chemicals industry, supplements raise the net earnings level to 90% of the regular wage level;
  • in the metalworking industry in the north Württemberg-north Baden bargaining district, the guaranteed wage level for short-time work is 80%;
  • employees in the wholesale trade in North Rhine-Westphalia receive a supplement equal to 16% of their average net earnings over the preceding three months. However, net earnings including the supplement cannot exceed 100% of a worker’s regular wage level.

According to IAB estimates, employers’ residual costs rise to an average of between 37% and 48% if a collective agreement provides for a guaranteed net earnings level of 90% (see table above).

Short-time working stabilises employment temporarily

Short-time working is credited with having prevented a sharp increase in unemployment in the German labour market over the past few months. According to the latest monthly BA press bulletin (in German), the number of employees working short-time due to a decline in orders was estimated at 1,400,000 employees in June 2009. In July, companies submitted applications for another 140,000 employees to local employment agencies and BA expects a further 110,000 to 120,000 new applications for August.

Although it remains unclear whether unemployment figures would have risen by the same number or slightly less if short-time working allowances had not been available, the positive impact is in general deemed significant. However, since companies still have to bear the residual costs of short-time working, its use can only be temporary. Many companies may lay off workers in the coming weeks if the volume of orders does not rebound substantially, which is widely considered as unlikely.

Oliver Stettes, Cologne Institute for Economic Research (IW Köln)

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