‘Hire and fire’ has destroyed Britain’s jobs economy

Europe’s biggest problem now is youth unemployment – we should be looking at the German labour model

As published in the Guardian: by David Marsh and Robert Bischof. http://www.guardian.co.uk/commentisfree/2012/jan/26/hire-and-fire-destroyed-uk-jobs

These days we tend to talk about the divisions in Europe as one between net creditors and debtors. In reality this is just a sideshow. There is a much more fundamental gulf, hinted at by Angela Merkel in her Davos speech yesterday: between countries with organised industrial training systems such as Germany, the Netherlands, Belgium, Scandinavia, Austria and Switzerland – all currently with jobless rates of between 3% and 7% – and those with much higher rates of unemployment, often in double digits, in peripheral Europe.

The issue pits Anglo-Saxon precepts of free market regulation against the Germanic “Rhineland” system of managed capitalism, with modern apprenticeship systems built on a long-term compact between labour and employers. In the years before and immediately after the euro’s birth in 1999, the peripheral countries of the European monetary union (Emu) often followed Anglo-Saxon principles by liberalising parts of notoriously inflexible labour markets. “Hire and fire” became the motto.

Initially this seemed to work. But as debt market conditions worsened and growth stalled after the 2007-08 financial crisis, Emu’s periphery has been left seriously exposed by the failure to replace unproductive regulations with new mechanisms to generate jobs.

In the battle between rival systems, “Rhineland capitalism” appears to be winning hands down. In the two years since the global economic downturn in 2009, Germany has expanded employment by 1.8m, while the UK, US, France, Italy and Spain have shed 7m jobs. In 2007, when most other countries were nearing the end of a boom driven by excess credit, Germany had the highest unemployment rate (8.7% of the workforce on a harmonised basis) of the group of seven leading industrialised countries. Yet in late 2011, according to OECD figures, German unemployment, at 5.2%, was the lowest in the G7 apart from Japan.

While the UK struggles with record youth unemployment, Germany’s youth unemployment rate is one third of the OECD average and one eighth of the rate in Spain. High youth unemployment is the most pressing problem in Europe right now – Merkel acknowledged as much when she admitted that mere austerity would make the European project meaningless for the next generation of young people. “Structural reforms that lead to more jobs are essential,” she said in her opening statement.

But Merkel is drawing strength from Germany’s own experience with low unemployment in the mid-noughties, and she is right to do so. While the German labour market underwent some Anglo-Saxon-style deregulation under Gerhard Schröder in 2003-2005, it still places more emphasis on employers’ freedom to build long-term loyalty between employers and workers. These relationships are embedded in a strikingly different cultural approach to industrial training, closely tied to the German tradition of family-owned Mittelstand businesses buttressed by long-term savings that take a generational approach to assembling skills and technology.

British politicians are keen to talk about “skills”, but at the same time they are reluctant to let go of the flexible labour laws that have set them apart from the European mainland in the past. They can’t have it both ways. Employers who do not have a sense of social responsibility for training are unlikely to be durably persuaded to hire apprentices through one-off state payments. Instead, governments should consider building comprehensive vocational training schemes that could be funded through a reduction in the social costs ensuing from unemployment. Tinkering with apprenticeship programmes on a piecemeal basis, as has been done in the UK, is unlikely to yield long-term results, as such half-hearted reforms result in expensive and wasteful systems that lack both scale and content.

And it’s not just the German system of apprenticeship schemes that could do with being copied. One of the main reason why Germany’s economy was able to recover so quickly after the downturn was the system of short-time working support (Kurzarbeit), introduced in the 1920s and extended in recent years.

Funded by an employment insurance levy, it pays for firms to keep workers for six to 12 months, provided employers can show their businesses are in a cyclical and not a structural downturn. Imagine a small engineering firm that ran into financial trouble in 2008: rather than letting go of the 17-year-old apprentice who had recently joined the firm, it would have been able to keep employees on board and then benefit from their experience when the economy was back on its feet. Even if the company had gone bust, the apprentice would by law have been sent to another company.

Sir Anthony Bamford, chairman of UK excavator maker JCB, points out that his company was forced to shed more than 20% of staff in Britain when production halved in 2009. By contrast, the Kurzarbeit system enabled him to keep all his labour force in Germany.

Such examples underline how Germany’s previously unfashionable model has enabled it to become the industrialised world’s premier job machine. As the economic climate darkens, 2012 will be a difficult year both for Germany to hold on to its advantages and for other countries striving to follow the German lead. Yet unless they start to lay the groundwork for longer term gain, time for catching up will soon run out.

Skills: The Key to Productivity

Numbers of so-called NEETS (young people Not in Employment, Education or Training) have risen to close to a million and over a million 16-19 year olds are out of work – the highest in Europe.

In the Lisbon Treaty of 2000 European leaders committed their governments among other aims to the promotion of Vocational Education and Training (VET) and expressively recognized that it has not only an economic but also a strong social dimension as Germany proves with the lowest unemployment rate among young people in Europe.

Numbers of so-called NEETS (young people Not in Employment, Education or Training) have risen to close to a million and over a million 16-19 year olds are out of work – the highest in Europe.

In the Lisbon Treaty of 2000 European leaders committed their governments among other aims to the promotion of Vocational Education and Training (VET) and expressively recognized that it has not only an economic but also a strong social dimension as Germany proves with the lowest unemployment rate among young people in Europe.

In the follow-up meetings in Copenhagen in 2002 (Copenhagen Declaration), Maastricht 2004 and Helsinki 2006, targets were set and monitored to improve and modernise vocational training by 2010 for young and old and start the process of a European Vocational Framework, which would allow more mobility between countries and recognition of each other’s certification regimes.

In the Brussels follow-up meeting in 2008 it was recognized that most of the targets set for 2010 were going to be missed, as they were too ambitious. However, as times are changing now, the problem is supposed to be addressed with renewed vigour or will it? There is some doubt that there is real energy spent on it.

GIUK Survey on Employability Reveals Confusion

German Industry UK (GIUK), an association of German businesses in this country, launched a survey of its members in 2008 regarding employability and availability of skilled people in the UK. The survey showed that German managers were confused about the diversity of offerings in vocational training and certifications and considered the general lack of young people, who would qualify for vocational training a drag on their businesses. My own experience in UK manufacturing and logistics bears this out.

In October 2008 and with some prodding from the Prime Minister, GIUK went on a 3-day fact finding tour to Germany with David Lammy, then Minister for Skills and three assistants to study the German dual apprenticeship system and visit a number of firms. The team was impressed. The minister promised to engage with GIUK, however before he could act he was promoted and handed over to Lord Young, who promised to pick up where David Lammy had left off. Three months later he was moved on.

German Industry, which employs directly and indirectly around a million people in the UK, had promised more apprenticeship places in return for involvement in the curricula and the overdue simplification and streamlining process of apprenticeships.

GIUK – speaking for its members – is clearly saying that the present system is preventing German business from being as competitive in their UK operations as elsewhere and demanding change. This is particularly important in manufacturing, however skills are important everywhere including the public sector.

We believe that at the heart of the problem in the UK is an at best well-intentioned and at worst spin-inspired attempt to make everybody into a “kind of academic” in the so-called “knowledge economy”.

Questioning the “Knowledge Economy”

What is the definition of the “knowledge economy” anyway? We don’t think it included in the minds of most politicians and educationalists skilled technicians, plumbers or carpenters. By going hell for leather for academia, it “devalued as an unintended consequence the craft skills and vocational training per se” – so the last but one Minister for Skills Lord Young at a German-British Apprenticeship seminar in London organised by GIUK.

The second big slogan of the Blair era was “no jobs for life”. In our view it was just as misleading and un-differentiated as the “knowledge economy”.

“No jobs for life” sounded like encouraging employees to job hop and a fig leaf for employers for a “hire and fire” culture. It is of course based on the idea of old industries versus new, on “creative destruction” and the supremacy of the service sector. There is some merit in all this, but it sits badly with youngsters starting off their careers. Why train, when I am changing jobs permanently? At Volkswagen and Vauxhall alike there are third generation of employees and they are proud of their commitment to their companies.

The new “Skills for Life” slogan and the creation of a “technical class” sound good but need substance.

GIUK can help.

Government thinking is changing – and not a moment too soon. The PM himself should re-state and clarify government policy in this area. Job hoppers do not produce quality work nor enhance productivity in companies as a rule.

The economic downturn and the crises of confidence in the present economic model present as much a problem as a rare opportunity to redraw the lines. It is safer again for politicians to look east towards Europe for values and inspiration after the disaster created by following the US lead in so many areas over the last decades.

The economy clearly needs rebalancing and Brits will have to look again to doing things themselves rather than looking for Johnny Foreigner to make the dishwashers and come over here to repair them, when they break down.

Call for Culture Shift

If apprenticeships and training are to be taken seriously and beyond political fad, there needs to be a change of culture regarding skilled employees – or human resources generally. Highly skilled jobs need to be better safeguarded during cyclical downturns.

During this recession unemployment in the US rose by over 8 million, in the UK by about 1.4 million and in Germany the jobless number rose by just 220,000, although the latter has been experiencing the biggest economic downturn since the war. Who is going to be ready and first out of the blocks, when things get back to normal? Who on the other hand has to spent £10,5bn so far in this crises alone on redundancy payments and later probably the same again in recruitment and training costs let alone the cost of the missed chances in the market place in the next upswing?

Why can German companies hang on longer to their skilled employees? The answer is simple. As they pay half the hypothecated employment insurance (2.8% of gross income), the employers are entitled by law to apply for short time work (Kurzarbeit) in a cyclical downturn. This means, if there is only work for two or three days a week, they can keep all their staff and the employees get paid for the full week. Unemployment benefit is also paid out of this pot.

During times of low unemployment and little or no short time working the hypothecated pot swells up and acts in an anti-cyclical manner in downturns. Germany’s pot was quite full, when this recession hit.

This 2.8% pot incidentally also pays for the vocational college education of apprentices and the advice they are given before, during and after their apprenticeships through the jobcentres and for their certification/examination by the Chambers of Industry and Commerce.

The cost of a proper apprenticeship training system could be recovered easily also by “social cost savings”, which could be achieved from a reduction in the hidden costs in Britain occurred through the highest youth alcoholism and drugs dependency, teenage pregnancy, young offenders and truancy rates in Europe – in other words the cost of the so-called “lost generation”.

Next Steps

To summarize what we believe is necessary –

  1. Schools have to prepare kids for a life of work depending on their varying abilities, which need to be recognised as to be in the majority non-academic
  2. There needs to be a more structured pathway for kids from schools to working life
  3. Non-academic jobs have to be valued by schools, governments and society generally more on a par with academic jobs
  4. There is a need to simplify and streamline apprenticeships, curricula, the certification process and it should be possible to take cost out massively
  5. Skilled workers’ jobs and those in training need a higher degree of protection in cyclical downturns

If we want to be serious in this country about training and social cohesion, it is our view that these points need to be addressed urgently. GIUK in conjunction with the German British Forum and German British Chambers are planning a series of conferences in Britain and Germany to further these ideas.

Bob Bischof
Chief Economic Advisor GIUK
Member of the LSC Youth Committee 2004-2008