Germany’s Labour Overhaul: Economists Warn Symbolic Reform Won’t Fix Structural Woes

Germany's cabinet approves labour reform extending fixed-term contracts to 4 years, easing dismissal for high earners, and scrapping phone sick notes, sparking fierce debate.

A far-reaching reform of German labour law, approved by the cabinet on 2 July, has triggered fierce debate between business lobbyists and unions. The package extends the maximum duration of fixed-term contracts from two to four years for new hires, eases dismissal protection for high earners, and scraps the telephone sick note introduced during the pandemic. Critics from academia and organised labour dismiss the changes as a political gesture that fails to address deeper problems in the labour market.

At the heart of the reform is the lengthening of so-called sachgrundlose Befristungen — fixed-term contracts that require no specific justification. Until now, these could run for up to two years and be renewed a maximum of three times. Under the new rules, for contracts signed before the end of 2030, the ceiling rises to four years and six renewals. Employers’ associations applaud the move, with BDA chief executive Rainer Dulger calling it a vital step to remove growth bottlenecks. But the Hans-Böckler-Stiftung reports that even in 2023, roughly 38 percent of all new hires were on fixed-term deals; among workers under 25, it was nearly every second contract. The Ifo Institute warns that such precarious employment undermines life planning for young people.

The package also makes it easier to dismiss high earners. Employees earning around 15,000 euros or more per month will face weaker protection. At the same time, the government plans tax privileges on severance payments, provided the worker quickly moves to a new job. Economist Gabriel Felbermayr, a member of the German Council of Economic Experts, describes the adjustments as fair and necessary. IAB researcher Enzo Weber similarly welcomes the tax incentive, saying it can ease transitions.

One provision that draws broad criticism is the abolition of the telephone sick note. From now on, employees must provide a medical certificate from the first day of illness. Doctors’ associations warn of a significant bureaucratic burden, and Weber calls the measure counterproductive. In compensation, tax-free supplements for Sunday and public holiday work will increase from 50 to 75 euros per hour, effective January 2027.

Reactions remain sharply divided. While employers celebrate the reform, unions — ver.di, IG Metall and the DGB — condemn it as an attack on workers’ rights. DGB chairwoman Yasmin Fahimi singles out the extension of fixed-term contracts. DIW president Marcel Fratzscher goes further, branding the entire package a symbolic reform that will not resolve structural labour market problems. Supporters expect a boost in hiring dynamics; opponents foresee growing precarity, especially for new entrants to the workforce.