COVID-19 in Germany: A hiring crisis

Dr. Anja Bauer
Senior Researcher
Institute for Employment Research of the Federal Employment Agency,

On  27 January 2020, the first case of COVID-19 was confirmed in Germany. Only three weeks later the politicians stopped public life by a lockdown. The service sectors were affected most by this lockdown. Schools closed, travel bans were introduced, accommodation and restaurants closed as well as most part of wholesale. Also, the activity in the industry declined as almost the whole world slowed down, so that the delivery of intermediate products and parts paused.

This situation led to the strongest economic reaction since World War II in Germany. In the second quarter of 2020, the gross domestic product dropped by 11.3 percent. Unemployment rose from 5.7 percent in March to 7.1 percent in August 2020 and only decreased slightly until now. However, in the light of the strong economic reaction the labour market behaved relatively robust. The reactions in unemployment and employment are mitigated by so-called short-time work, the German job retention scheme.

Principally it serves as an automatic stabilizer and allows firms which experience economic difficulties to temporarily reduce the hours worked of their employees. The employees receive income support from the Federal Employment Agency in Germany for the hours not worked. As many sectors are affected by the crisis, the take-up of short-time work rocketed. During the first wave in spring 2020, almost 6 million workers were covered by the short-time work scheme. This is an extraordinary high number compared to other recessions. For instance, during the financial crisis only 1.4 million workers were covered. On top of that, atypical employment, which is not covered by short-time work, plummeted.

Though short-time work stabilizes employment, the question remains unanswered as to how quickly the labour market will recover from this shock. Scientific studies, that analyse the impact of the lockdown measures on labour market flows, indicate that especially hiring is hampered and only shows weak signs of recovery. Moreover, the length of the lockdown exhibits stronger effects on the flow rate from employment to unemployment. But, the degree of closure impacts both flow rates, from unemployment to employment and vice versa, to a similar extent. However, the effects of the lockdown on labour market flows are non-linear over time. In other words, the longer the lockdown lasts the less decrease in job findings and the less increase in separations is found.

Furthermore, workers who fear to lose their jobs or are currently unemployed search less actively. Search intensity but also placement intensity dropped during the crises and are still lower compared to the pre-recession level. Another stylized fact is that the asymmetric distribution of the crises in terms of industry sector spills over to the application behaviour. There is evidence that people from severely affected sectors search in sectors that experienced an increase in demand during the pandemic. For instance, people that work or have worked in the travel and recreation sector are searching now in the health sector.

Another issue that has emerged recently is that unemployment is about to become more persistent. Since the crisis has been going on for over a year now, more and more workers leave the compensation scheme of unemployment insurance and enter the pool of long-term unemployed (i.e. unemployed for over a year). This is worrying as research shows that long-term unemployment is still stigmatizing and can have long-lasting consequences, especially scarring effects and hysteresis.

From the firms’ perspective, surveys show that in the fourth quarter of 2020 almost 20 percent of all firms received state subsidies from the Corona aid package. Among those firms that have been particularly affected by the crisis, the share even rises to almost 40 percent. That implies that the bankruptcy risk is elevated due to the crises and that firms that have been financially healthy might now be in difficulties. Though a wave of bankruptcy is not about to be expected as state aid helps to prevent this, it has implications for firm growth and thus labour demand. This is evident looking at the pool of vacant positions, which is only recovering slowly.

The most critical aspect of the corona crisis on the labour market results from a lack of new hires. While policies like short-time work have been successful in avoiding additional job separations, they are not sufficient to improve the labour market sustainably and to avoid undesirable effects. This can be achieved, for instance, by providing financial support for new hires.

A potential option would be to temporarily pay social security contributions for new jobs from the tax budget. This would not only incentivise rapid recruitment, but also encourage the creation of jobs subject to social security contributions instead of creating or re-hiring mini-jobs. One may focus such measures on long-term unemployed and those who are at risk just as on professional newcomers.


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