FRANKFURT—German unemployment fell in July for the 13th consecutive month, putting Europe's largest economy on the brink of a milestone: regaining all the jobs lost during the recession far faster than many economists expected.
Germany's labor market—aided by government subsidies aimed at keeping workers on payrolls at reduced hours—is a contrast with the U.S. where, despite a much more rapid recovery in output so far, unemployment remains stuck near its recessionary peak.
Thursday's labor-market data, along with strong consumer-sentiment figures in the euro zone, pushed the euro to an 11-week high against the U.S. dollar, above $1.30, as investors gain confidence that the euro zone is on a more solid economic footing than seemed the case only weeks ago.
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Workers at the construction site of the Marienplatz-Galerie shopping center in June in Schwerin, northeastern Germany. The country's unemployment rate has declined for 13 months.
Still, Germany's export-dependent economic recovery remains at risk amid signs of softer growth in the U.S. and Asia, economists warn.
During the global downturn in 2009, Germany, the world's fourth-biggest national economy, was relatively slow in launching its economic-stimulus package, which was less sweeping than that of the U.S. Now, amid debate about the timing of stimulus withdrawal globally, Germany has led the argument for fiscal rigor and disciplined spending—despite U.S. calls to keep the stimulus engine going—and has announced budget cuts for next year to reassure the German public that the deficit won't balloon.
Unemployment in Germany fell 20,000 in July to 3.2 million in July, the government labor office said, putting it near the pre-recession trough of 3.19 million last seen in October 2008. Germany's jobless rate fell to 7.6%, its lowest in nearly two years, and well below last year's peak of 8.3%. The U.S.'s official unemployment rate crept down to 9.5% in June, after peaking at 10.1% last year.
German employment, reported with a one-month lag, grew 25,000 in June, and also is back near pre-recession levels.
German politicians had feared joblessness would keep climbing past four million during the recession—which shaved 5% off the country's gross domestic product last year—and beyond. Now, Germany's federal labor office says unemployment could fall below three million later this year, the lowest level in nearly 20 years.
The country is faring better than the rest of the euro zone. Unemployment has been stuck at 10% in recent months across the 16-nation currency bloc.
Germany's improved fortunes are spreading optimism through the euro zone. The European Commission's economic-sentiment index, which covers business and households, surged in July, led by a sharp rise among German respondents.
Some German industries already are running into a labor shortage.
"We still have a lack of people to work on consulting jobs," said Lothar Kunkel, senior partner in Stuttgart at ConMoto Consulting Group, an 80-person firm that advises German companies on procurement and supply-chain management.
Even when meeting with clients, "we are asked if we have people available that can join their companies," Mr. Kunkel said.
Germany's experience bucks the stereotype that the country's heavily regulated labor market entrenches high unemployment and struggles to create jobs, especially after a recession. This time, it is the more-flexible U.S. labor market that is lagging, exhibiting both higher unemployment and a slower revival in hiring.
The truth, economists say, is that Germany is benefiting from a mixture of circumstances and good policy, and that the U.S. model remains better at moving labor from declining industries to new ones.
Germany has limited job losses in part because of a popular subsidy program for short-hours work, known as Kurzarbeit. Under the plan, companies reduce workers' hours but keep them on staff, with the government kicking in for some of their lost wages and social-security contributions.
At the peak last May, as many as 1.5 million workers were in the program. That has been cut to about half a million, as companies move workers back to full-time shifts to meet rising demand, particularly in the export sector. German unions also have made wage concessions to preserve jobs.
"The German economy was mainly hit by an industry recession in exports," said Klaus Abberger, an economist at Germany's Ifo Institute. "We filled this gap in manufacturing with our short-time working program."
The U.S., in contrast, is still struggling to generate jobs despite a much stronger economic recovery than Germany has seen thus far.
Unlike Germany, the U.S. government didn't embark on large-scale efforts to keep people in their jobs. Rather, stimulus was aimed at supporting demand, while allowing sectors hit hard by the recession, such as construction, to shed hundreds of thousands of jobs.
As a result of the labor shake-out and a faster bounce in output, U.S. productivity has outstripped Germany's, growing even at the height of the downturn when productivity usually falls. That should eventually support U.S. employment growth as companies with bare-bones staffing levels start to hire. Over the course of the recovery, economists expect the U.S. economy to create more jobs than Germany's.
German industry is still digesting a big drop in productivity because output fell faster than employment during the recession. But German companies bet that over time, keeping experienced and well-trained workers in their jobs will be good for business.
"I favor the German approach to the current crisis because I think they did a better job of spreading the cost [of the recession] over the full population," noted Barry Bosworth, economist at the Brookings Institution in Washington. In the U.S., "firms panicked and laid off workers as an extreme reaction," Mr. Bosworth said, "and seem to be making do with fewer workers—a one-shot productivity gain."
But the German way wouldn't work in the U.S., Mr. Bosworth and other economists say. The main difference: Germany's export-driven economy looks much the same today as it did heading into the recession, and its policies have allowed industry to bridge the gap until world trade recovered.
The U.S., however, lost much activity in the overheated real-estate sector and related industries for the foreseeable future. "These jobs won't come back," says Mr. Abberger. Preserving jobs in U.S. construction would only have delayed the pain, he says.
After a sluggish start last year and into 2010, Germany's recovery gained traction in the second quarter, growing as much as 5% at an annualized rate, economists say, largely thanks to exports.
Germany's jobs recovery will run into constraints later this year, economists warn. The say output growth could slow later this year, especially if growth falters in key export markets like the U.S. and Asia. Though domestic spending in Germany is starting to rise, many economists doubt its notoriously frugal households will be able to propel the economy.
The German think tank DIW expects Germany to grow around 2%, at an annualized rate, this quarter, and some economists expect even slower growth at the end of the year.
