Advertisements

Work Like a German: Germany emerged from recession with lower unemployment. We could learn from that

Work Like a German

By GLENN HUTCHINSMARCH 14, 2014

SOME of our workplace programs, like Unemployment Insurance and Disability Insurance, parts of which date from the 1930s, desperately need updating. The original designers did not envisage such large numbers of people unemployed for long periods of time or living on disability benefits. If we could convert these programs into ladders of upward mobility, they would disproportionately benefit the disadvantaged, as well as strengthen the economy. We need to focus on enabling workers to stay in work — rather than having to compensate them after they have lost their jobs.

We need only turn to Germany to see how much more effective such an approach can be. In 2009, Germany suffered a more precipitous drop in gross domestic product than the United States, but it experienced almost no change in unemployment. Here, it doubled. Today, unemployment in Germany is actually lower than it was pre-crisis, and long-term unemployment is negligible. With America’s unemployment rate stuck above 6.5 percent, the contrast is stark.

In the German job-share model (known as “Kurzarbeit”), if an employer cuts an employee’s hours so that income is reduced by more than 10 percent, the government compensates workers for a large portion of wages lost. This enables companies to cut costs during downturns without having to lay workers off. And then they’re better placed for a recovery because they’ve been able to preserve their pool of skilled labor. America should have a similar program to enable people to share jobs and to give employers an incentive to cut hours rather than staff.

When people lose their jobs but find work at lower wages, the new program could plug the gap by supplementing their income. For the long-term unemployed who take significantly lower-paying jobs (typically, at minimum-wage levels), the unemployment benefits could offer stop-loss insurance to put a floor under their losses. The new program should also subsidize employers to provide paid sick days, family leave and child care support — measures that are especially important for disadvantaged women in the work force.

Today, the unemployed are required only to look for work, but not to do anything to improve their qualifications. At the same time, the proportion of the unemployed who risk exhausting their benefits and facing severe hardship — as opposed to those who need temporary income support while between jobs — has grown markedly in recent years. The new program would focus training resources on the group that most needs it, those without skills. Taking another page from the German system — this time, its apprenticeship program — training should include both internships and postgraduate job placements.

Turning to Disability Insurance, the unprecedented rise in claims is clearly linked to the weakness of the job market. With the chronically unemployed forced to seek other sources of income, nearly 5 percent of the working-age population, or nine million working-age Americans, are covered by disability benefits.

Once workers go on the Disability Insurance rolls, it has proved very hard to get them off; all the while, their skills and contacts in the workplace atrophy. In the fiscal year 2013, the program is estimated to have cost a record $144 billion.

Given weak labor markets, employers have no incentive to hire disabled workers, so without reform, the number of people on Disability Insurance will stay stubbornly high. We need to intervene before people enter the program — and give those in it a better reason to exit. We should also introduce a new category of the partially disabled, so that the program can act as a wage supplement for those who are still able to work, rather than forcing them to make an either-or choice. Disability Insurance should also subsidize the employer’s cost of accommodating and training disabled people. We can fund this through the savings made when people come off disability benefits as they go back to work.

Of course, everything proposed here is made easier if we achieve higher economic growth. Many of these reforms would involve new ways to spend existing funds, and others would be self-financing, but there’s no denying that the additional funds needed would be hard to wring out of already stressed public budgets. And there is no substitute for the critically important investments in infrastructure, education and research our country needs.

There is a consensus to be won here: Liberals should get behind reforms that incentivize work, and conservatives should back the required government spending. After all, the welfare reform of the 1990s, while not flawless, has been a success, and that was achieved under a divided government. We can get this done, too.

Advertisements

About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: