NEUWIED, GERMANY - 14 JUNE 2014 - The outdoor chess set in the streets of Neuwied is popular with pensioners and shoppers alike. Photo taken on: June 14th, 2014
Game on: the proportion of those aged over 60 is rising

There is much to applaud in Germany’s labour market. A set of government reforms, ushered in during the early years of the last decade, has led to a sharp drop in unemployment and created a more flexible labour force.

Until the introduction of the Hartz reforms, the jobless rate had risen from 1 per cent in the 1970s to more than 10 per cent in the early 2000s. Today, an economy that in 1999 was tagged by The Economist as “the sick man of the euro”, is viewed as the euro zone’s economic powerhouse.

Yet the fall in unemployment, which at 4.6 per cent is at a post-unification low, has created one of the biggest challenges facing the country: a shortage of skilled labour. A recent study by the Cologne-based IW think-tank identified shortages in 96 industries.

The problem will become more serious in the decades ahead, as the generation born in the years following the second world war retires, says Clemens Fuest, president of the ZEW think-tank, based in Mannheim. The German population is set to fall almost 10 per cent, from a 2002 peak of 82m to 74.5m by 2050, according to UN figures.

The proportion of those aged over 60 is expected to rise from 27 to 39 per cent, while the country’s percentage of young people will be among the lowest in the world. Germany’s average age, at 46, is second only to Japan.

“This will be a big shock to the German labour markets,” says Mr Fuest. “And trying to solve the issue by people having children will not work, because it’s too late for that.”

The recent influx of refugees — Germany is expecting 1m, or even 1.5m according to some estimates, to arrive this year — could help to redress some of the shortage of skilled labour, he adds. “There is potential there and over the past decade or so, Germany has made its laws more immigration-friendly . . . [the next step is] about making sure immigrants have sufficient professional skills,” Mr Fuest adds.

Increasing childcare provision would also help redress the relatively low number of women in the labour market.

Christian Reichel, a partner in labour law at Baker & McKenzie’s Frankfurt office, believes there is more that Berlin can do to address this problem. He would also like to see the government introduce more flexible working conditions for older people and encourage retirees to work part-time.

Outsourcing online work to other countries could allow German companies to tackle the shortage of skilled workers. While this would benefit companies in some parts of the services sector, it would be trickier in manufacturing.

Tech start-ups in Berlin try to replicate Silicon Valley’s perks to attract staff. Wooga, a mobile games developer, rents flats to recruits and offers translation help with rental contracts to encourage workers to move to Germany. While it is difficult for German companies to match the pay of US technology groups, some have played on Berlin’s appeal as a vibrant and comparatively cheap capital city and the good conditions available for workers.

Mr Reichel believes Germany’s larger, more traditional companies should look to the start-up scene for ideas. “Companies can become more dynamic in how they allow employees to work. The [working] landscape hasn’t changed in a decade and a restricted labour market has become even less flexible,” he says.

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