* Job subsidies prevent structural labour mkt reforms
* Could damage productivity, hamper trade and growth
* Subsidies push up labour costs, weigh on budget
By Sarah Marsh
BERLIN, June 3 (Reuters) - German subsidies to prop up employment by reducing working hours have helped bring about a "job miracle", but it may prove a mirage if they prevent necessary structural changes and hamper competitiveness.
Firms in Europe's largest economy have shed surprisingly few jobs in the global crisis, thanks in substantial part to state spending to encourage "Kurzarbeit" -- shorter hours.
But a number of economists are criticising the government's decision to extend the Kurzarbeit scheme to March 2012, arguing it is redundant in a recovery, creates false incentives for companies to retain workers and raises labour costs.
If the country does not wind down the stimulus measures in good time, it could damage productivity, eating into Germany's share of global trade and stunt growth.
"Kurzarbeit costs companies money, it costs the state money and productivity has fallen," said Joachim Scheide, chief economist of the Kiel-based IfW economic think tank.
"Over the mid-term it risks hindering structural changes at firms and preventing natural staff fluctuations -- which could hold back growth. How much it would cost is very hard to say."
Germany exited its deepest post-war recession in the second quarter of 2009 and recent economic indicators have beaten forecasts, with industrial output and orders surging in March while exports rose at their fastest rate in nearly 18 years.
The strength of the country's industrial competitiveness has caused friction with key trading partners like France, who argue German wage restraint has depressed demand at home, curbing appetite for foreign goods and reducing potential for growth.
Widespread use of reduced hours could help offset this if the scheme leads to a lasting increase in labour costs. But it could also damage German competitiveness.
MASKING PROBLEMS
Unemployment fell for the eleventh month running in May and was kept in check throughout the crisis, prompting Economics Nobel Laureate Paul Krugman to call it a "jobs miracle".
Many firms, especially in export-oriented industries such as the engineering sector, avoided mass lay-offs by exploiting the unique legal provision of Kurzarbeit, whose origins go back to 1910 but which has been heavily ramped up during the crisis.
However, the DIW economic think tank pointed out in a recent research paper that even sectors hardly affected by the economic turmoil were drawing on the Kurzarbeit scheme.
In the meantime, others continued to opt for reduced working hours although they were unlikely to achieve capacity levels again that would warrant holding onto all their workers.
"Some sectors that were little impacted by the crisis are perhaps drawing on the Kurzarbeit scheme because of operational difficulties or structural problems," the DIW wrote.
Jobless data look less impressive in this light, as critics say they fail to include some long-term Kurzarbeit workers for whom subsidies have become an ersatz unemployment benefit.
The DIW said three quarters of all workers on Kurzarbeit had been benefiting from it for longer than six months in December, while 85,000 had been drawing on it for longer than a year.
"Around summer 2008, there was a real surge in registrations, so two years later -- when those subsidies expire -- there is a big risk unemployment will pick up," said Jennifer McKeown, an analyst at Capital Economics.
Instead of supporting jobs in structurally weak sectors such as the car industry, the government should promote job creation in sectors with more potential such as healthcare and research and development, said Carsten Brzeski at ING Financial Markets.
"It doesn't need a lot now to redirect the job market and make this success story last for a while," he said.
EXPENSIVE SCHEME
Furthermore, Kurzarbeit is partly to blame for the sharpest rise in hourly labour costs in Germany in over a decade last year, according to the Federal Statistics Office, as cuts in pay were less than proportionate to reductions in working hours.
The rise far outpaced the euro zone average. [ID:nLDE62T0WN]
"We need to be careful that we do not perpetuate the one-off rise in unit labour costs but get them back in check over the next few years," said Holger Schaefer, a labour market expert at the Institute for Economic Research of Cologne.
"Unit costs should decrease with increasing labour demand at firms, resulting in smaller working time reductions, but if not we could have problems with competitiveness," he said.
Much of the financial burden of Kurzarbeit has been taken on by the government rather than by firms themselves. The scheme cost the Labour Office 4.6 billion euros in 2009.
Previously, companies had to shoulder all social security contributions of workers on shorter hours, but under new laws introduced in the crisis the Labour Office pays 50 percent of this for the first six months, and 100 percent thereafter.
Kurzarbeit is thus a major burden on the budget, at a time when consolidation is a major concern. This is offset in part by the fact the state has to dole out fewer jobless benefits.
However, analysts say the dangers harboured by Kurzarbeit are receding as the German recovery gains traction.
The number of workers on Kurzarbeit declined to around 830,000 in March from its peak of more than 1.5 million in May 2009 and could fall further as production picks up.
ING's Brzeski said Germany still had to be careful. "The government should not be complacent and overstretch a success story," he said. (Editing by Mike Peacock)