The misconception of the large loss of income due to the crisis

After years of mass unemployment in the 1990s and early 2000s, an employment miracle has taken place in Germany that was hardly slowed down even by the global financial crisis and the corona pandemic. On the contrary, in 2022, employment subject to social security contributions has climbed to an all-time high.

The unemployment rate dropped to levels that were still considered wishful thinking at the turn of the millennium. No wonder that the question of the costs of structural change, insolvency and job losses faded into the background in this environment. Now the war in Ukraine and the looming recession, but also the ecological transformation that is becoming ever more urgent, have put these questions back on the agenda in Germany as well.

While the focus of the corona pandemic was on companies from the catering or retail trade with comparatively few employees, the current problems surrounding energy prices are fueling the fear that masses of jobs in German industry are on the verge of disappearing.

So what happens to people who lose their jobs in the crisis? Central economic and social questions are why, under what circumstances, to what extent and for what period of time employees have to bear loss of earnings after losing their job.

In order to answer these questions, economic research compares employees who lost their jobs due to a company's insolvency with employees whose employer was able to assert itself in the market. By comparing with a control group, the consequences of acute crises, but also of structural change, can be examined causally.

The focus on the insolvency of companies reduces the risk of also recording those dismissals for which employees are directly responsible, for example through personal misconduct.

Studies from Great Britain and the USA sometimes find huge and long-lasting loss of earnings of up to 30 percent. The findings are somewhat better for Germany: In a recently published study for the period before and during the financial crisis at the end of the 2000s, the labor economists Daniel Fackler, Jens Stegmaier and I show that the decline in annual income from work in the year of the employer's insolvency compared to the control group is about 25 percent.

After five years, the loss drops to 10 percent. Part of the decline is due to a short-term lower likelihood of being employed: some laid-off workers are unable to find a new job quickly. What is important in the long term, however, is a permanent decline in gross wages.

A key finding is that wage losses when small businesses go bankrupt are close to zero. On the other hand, employees from insolvent industrial companies with more than 100 employees have to accept painful and sometimes permanent gross wage losses of 10 to 15 percent.

In order to be able to better understand the reasons and the individual impact of wage losses, a classification into high and low wage employees as well as high and low wage companies is instructive. High-wage workers are people who earn above average, no matter where they work.

High-wage companies pay all of their employees more than their competitors. Based on this classification, a key reason for permanent wage losses becomes apparent: Laid-off workers often have to switch to low-wage companies and only rarely manage to move up to better-paying companies afterwards.

A second new finding, which is also explosive in terms of social policy, is that low-wage employees in particular have to switch to low-wage companies after insolvency. As a result, bankruptcies and company closures are accelerating a trend that began in Germany a few decades ago and has significantly increased wage inequality: the increasing sorting of high-wage employees into high-wage companies and low-wage employees into low-wage companies.

This sorting is caused, for example, by outsourcing: While canteen employees, security guards and other employees with formally low qualifications were still (tariff) employees in high-wage companies in the 1980s, today they often work for low-paying service providers, sometimes even at the same workplace. Nevertheless, there are numerous companies that have not followed this trend. Due to the insolvency of such companies, the missing sorting is now being made up for.

What do these results mean in the light of the coming challenges that rising prices for energy and primary products are confronting German industry with? In 2021, it was mainly smaller companies outside of industry that were affected by corona restrictions and their existence was in some cases endangered, but industrial companies are more likely to be affected at the moment.

A look at the current figures for the IWH insolvency trend already shows a clear shift. In 2021, for example, only 23 percent of the jobs in the largest insolvencies were in industry, in 2022 it was 35 percent. The number of industrial jobs affected by these insolvencies rose by half.

The above study results imply that the average wage losses per laid-off employee in 2021 were rather small. But for a few months now, more and more employees have seen their companies go bankrupt, who will be confronted with severe wage and earnings losses.

So far, so worrying. However, there are good reasons why the situation is not as bleak as it might appear at first glance. First, the rampant labor shortage is now significantly increasing the chances of re-employment for laid-off workers – a circumstance that was not yet so strongly reflected in the study on the financial crisis. Last but not least, we need many qualified employees for the ecological renewal of the German economy.

Secondly, studies show that the German labor market has so far proven to be very robust in the face of other major changes such as the globalization push at the turn of the millennium and the steadily increasing level of automation. On balance, jobs in Germany have not been permanently lost and wage levels have not fallen sharply.

Thirdly, labor market research shows that the financial losses after losing a job measured in terms of net household income, i.e. after taxes and social transfers, are very small in Germany and also significantly lower than in the case of gross wages. A job loss in Germany is financially cushioned comparatively well by the existing transfer and tax system.

The following therefore applies: Even if the current energy price shocks have led to production declines, especially in the energy-intensive sectors of German industry, and jobs in these companies are at risk, the state should allow this structural change. Qualified employees are desperately needed in many places. In this environment, there is no threat of mass unemployment or large-scale loss of income.

professor dr Steffen Müller heads the Structural Change and Productivity department at the Leibniz Institute for Economic Research Halle (IWH).

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