Abstract

What explains Germany’s exceptional labor market performance during the Great Recession of 2008-09? Contrary to accounts that emphasize employment protection legislation or government policy, this article argues that actions by firms—embedded in ever-changing coordinative institutional structures—were crucial. Firms chose to keep rather than shed labor, a strategy induced by a “toolkit” of flexible labor market instruments that had evolved incrementally over the past thirty years; wage restraint and successful internal restructuring of firms during the past decade, which fueled an export boom before the crisis. Firms thus had some margin for maneuver, using internal flexibility to protect their investment in skilled workers. These and other institutional changes driven by firms reflect a process of successful adaptation to external economic challenges, but did not fundamentally undermine Germany’s coordinated form of capitalism. The result is not a new German model that was purposefully designed; instead German firms slowly discovered new ways to cope with economic challenges.