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EU comparison: German labor market prepared for the future

Labor market policy is a challenge for all European governments. The desire for stable and secure jobs and the demand for flexibility are facing each other. Our new study has examined and compared the mobility of the European labor markets. Here Germany seems to be well prepared.

Foto Daniel Schraad-Tischler
Dr. Daniel Schraad-Tischler

The labor markets in many EU countries are not sufficiently mobile or flexible to tap their full potential for new, stable jobs after the end of the economic crisis. This is shown in a study by the Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI), which compared the labor markets in 23 EU countries on behalf of us.

The comparison indicates that the labor markets in Scandinavia and the Baltic states are especially mobile and flexible. In France, Italy and many South Eastern European nations, however, labor markets show rigidity and low mobility, including a failure in particular of temporary employment as a stepping-stone into permanent jobs. Especially in those countries, the study finds a high need for further labor market reforms. However dependent a national economy may be on the overall economic environment and diverse individual factors, the shaping of employment protection, unemployment insurance, and qualification measures has an impact that reaches beyond economic adaptability. The prospects of employees and job seekers, too, are decisively influenced by the mobility of the national labor market.

EU: Fixed-term employees often do not have a chance to enter a permanent employment

A direct comparison between Germany and France, for example, illustrates just how strongly the chances of entry into the labor market depend on its mobility. Employees in both countries enjoy relatively strong employment protection. Partly as a result of this, one in every two unemployed persons in these countries must settle for a fixed-term employment contract when entering or reentering the labor market. While in France this is accompanied by a high minimum wage and rigid wage-setting, employment protection in Germany is accompanied by flexibilizing measures at the company level – substantially increasing advancement opportunities for fixed-term employees in the country. In a given year, 36.3 percent of workers in Germany with temporary contracts achieve the transition into permanent employment. In France, only 10.6 percent achieve this – the lowest rate in the EU.

As in France, this transition is achieved by only a low percentage of workers in Poland, the Southern European countries, and the Netherlands. Potential goes untapped above all in countries in which an especially high rate of fixed-term employment contracts coincides with a failure of the stepping-stone function. One such case is Poland, where 84 percent of the unemployed obtain only temporary contracts on reentering the labor market and just 18.5 percent of fixed-term workers find permanent employment in a given year. In Spain, Portugal, the Netherlands and Slovenia as well, over 70 percent of the formerly unemployed are hired into only temporary positions (EU average: 48 percent).

Inflexible labor markets inhibit advancement opportunities

The lack of prospects for a permanent job provides little motivation to employees. Europe-wide, the risk of losing one’s job is more than four times as high for temporary workers as for those with a permanent employment contract. Additionally, a fixed-term contract often goes hand in hand with less further training and lower wages. "That's bad for productivity and certainly not in the interest of either employees or employers", says Aart De Geus, Chairman and CEO of the Bertelsmann Stiftung.

According to the study, creating sustainable jobs requires, not least, high investment in a qualified and flexible workforce. The especially flexible labor markets in Scandinavia manage to link mobility with high job security and low wage inequality.

"The more mobile, the better, would be too simple a formula. What's needed is a healthy balance between security and incentives. A good employment policy is always an orchestration of many different parts."

Aart De Geus, Chairman and CEO of the Bertelsmann Stiftung

In Scandinavia, an activating labor market policy and high spending for occupational training and development lead to career advancement for many workers.

In Estonia, Sweden, the UK, and Germany, workers are also more mobile than in the other EU countries. In Estonia, for example, 12.7 percent of employees change jobs in a given year and the probability of occupational change is above 7 percent. France, in contrast, shows corresponding change rates of just 4 and 1.7 percent.

Please find the complete study (only in German) and a Policy Brief about fixed-term employment and European labor market mobility (in English) on the right side.