Lessons from Germany

December 16, 2013

Tony Verheijen, Country Manager for Serbia B92 Blog

More than 11 percent of the workforce was on the dole. A widespread assumption was that unemployment could never be defeated. Then a courageous politician introduced reforms that transformed the labor market.

You might think I am talking about Serbia today. No, this is Germany in 2003. It is the country which ten years later reaps the benefits of a politically courageous reform by Gerhard Schröder: Germany today has record employment and the lowest youth unemployment in Europe. In spite of the economic crisis which is shaking the rest of the continent.

What did the Germans do?

Their aim was to make Germany’s labor market flexible. So they enabled small businesses to fire more easily, thus lowering their risk of hiring. They liberalized other rules, such as those for part-time and temporary work. Above all, they introduced rules that prod the unemployed into seeking, and accepting, work. These reforms are certainly not the only factor underlying Germany’s success. Restrained growth in wages and healthy demand for exports were equally important. But it would be foolish to ignore Germany’s experience and it is an important lesson for the rest of Europe and the world.

Serbia is at the similar crossroad today as Germany was back in 2003, though the stakes are even higher. Serbia faces a choice between a chance to turn the corner and join the European mainstream, or to sink into further crisis and irrelevance. To turn the corner, Serbia needs to move forward decisively on serious and painful structural reforms, such as to resolve the status of the 153 companies in the portfolio of the Privatization Agency. And while some of these companies will find a future, many will have to be closed down. But these companies also own assets which are now locked up, and the idea is to free them for productive use, which will boost the economy. In the process, initially jobs will be lost, but it is expected that new jobs will be created as enterprises will start making productive use of the assets (real estate, land, etc.) that will be unlocked. However, the labor code as it currently is puts at risk these potential benefits of the reform process: firms will think twice before hiring staff as long as some of the anachronistic elements of labor law in Serbia remain in place. Hence, revising labor legislation becomes critical for making sure that the SOE reform process translates into hiring decisions by those that acquire and use the assets.

Key elements of the labor legislation which will enable this are: ease of hiring and firing, active labor market programs, ease of hiring people for part time jobs, and adequate severance payments. Businesses will be reluctant to hire people when the things are going well if it will be complicated and expensive to fire them when the situation deteriorates. This is hurting the employment of young and unemployed people the most. Programs such as “the first chance”, learning on the job, or internships are also important for employment of young people. Many of the laid off workers will be elderly and with low skills. The labor code as is makes them almost unemployable. Rules which make hiring for part time jobs and mini jobs – as they called them in Germany – cheaper and legally easier can play an important role for them, as these kinds of jobs in particular could absorb some of the older workers and ensure that they will remain economically productive. Employers will also hire them more easily if they don’t have to fear they will have to pay severance for all of their working years.

Of course, these are not solutions which bring quick benefits. Nevertheless, they are the only sustainable way forward.   

There are champions of such reforms among Serbian political elite. But will they succeed? I do hope the citizens of this country will base their views and opinions on facts and not on scaremongering, and that they will support the efforts of those that have an economic vision for the future of the country.