ZEW President Franz on Protection against Dismissal

This article appeared in the April edition of the ZEWnews.

Protection against dismissal has always featured in the discussion surrounding economic policy in this country and it is important that this continues. Though the German government has commendably taken several tentative steps towards greater flexibility for employers and workers, we still haven’t seen the much needed big push in this area. The same applies for the most recent suggested reforms from the CDU/CSU, which are based on insights that are principally correct, but which due to bitter opposition – it should be noted, not just from the usual suspects, from within the party itself – are far too toothless to be described as any kind of comprehensive reform. In terms of internal party disputes over concrete steps towards reform, the two main parties are actually more alike than often believed.

The problem with current employment termination rights should be well-known enough by now that we can simply stick to the key terms. The problem lies first and foremost in the fact that in Germany no one can be dismissed from their job. So where do all the 3.5 million people who leave some form of employment and enter unemployment every year come from? The real problem lies much more in the fact that dismissing workers incurs high costs for employers in the form of severance payments. Protection from dismissal here in Germany serves as little more than a bargaining chip to haggle over severance pay. In the face of absurd rulings from employment tribunals and the further expansion of legal protections against dismissal which go far beyond the usual legislative scope, such as the jurisdiction of employment tribunals over legal disputes, companies prefer to pay the ransom and offer severance payments even to workers who are not entitled to them.

In other words, legal protections against dismissal here in Germany are increasing the cost of labour in a similar way to other non-wage labour costs. It is an illusion to think that workers receive this protection from dismissal at no cost whatsoever. They pay for it, either in the form of lost wages (a frequently used justification for lower wage increases in the public sector compared to the private sector is greater job security in the public sector) or in the form of job losses. Viewed in this light, the current legal protections represent an unnecessary interference for both workers and companies, who do not strictly need these protections apart from some exceptions, such as the ban on arbitrary or unfair dismissal. In a free society of course, the onus is on the opponents to any reform to justify their position, and not on the reform’s supporters aiming for more optional solutions.

There are a number of suggested employment protection reforms on the table and lawmakers don’t need to reinvent the wheel here. Recently the German Council of Economic Experts and, in recent days, the Kronberger Kreis from the Stiftung Marktwirtschaft presented their own elaborate alternatives to the current law which have a number of key aspects in common. The basic idea is that workers and employers by mutual consent waive the legal protections against dismissal (even after the newly introduced reforms) and instead come to an agreement on severance payments or an increase of their current salary. In this way the workers’ preferences are taken into account. Workers who wish to can still receive the legal protection against dismissal, while those who might prefer higher wages can, as long as their employer is in agreement. If they choose to, employers can make themselves more attractive to potential highly-qualified employees by implementing a worker-friendly dismissal policy. Last but not least, due to the lower risk of job loss, many workers still seem to be attracted to public service.

A comprehensive reform of legal protections against dismissal is still on the government’s to-do-list.