3 million unemployed despite a shortage of skilled workers: The bitter truth about our economy

AI, crisis and short-time work: Why the German labor market is currently splitting into two extremes

Skilled worker shortage on the one hand, job insecurity on the other: What's going wrong in the country right now?

For years, the German labor market knew only one direction: upwards. Companies were desperately searching for staff, the buzzword of the ubiquitous skills shortage dominated the debate, and those with qualifications could practically choose their employer. But this certainty is crumbling dramatically. Suddenly, unemployment figures are approaching the three million mark, young university graduates are sending out dozens of applications to no avail, and Germany's core industries are quietly but consistently cutting tens of thousands of jobs. How can this be? How can an economy simultaneously suffer from a blatant skills shortage and rising unemployment? This apparent contradiction is, in reality, a symptom of a profound structural crisis. Demographic change, the rise of artificial intelligence, and the gradual decline of Germany's industrial base are tearing the labor market apart into two extremes – with dramatic consequences, especially for those entering the workforce.

When skills shortages and mass unemployment exist simultaneously – why this is not a contradiction, but rather a symptom of a deeper economic failure

For a long time, the German labor market was considered a prime example of a robust economy. Those with qualifications could practically choose their employer. Human resources managers complained about empty application folders, business associations alarmed politicians with studies on skilled worker shortages, and successive federal governments recruited workers worldwide – from Filipino nurses to Indian IT specialists. The message was clear: Germany needs people. And urgently.

But this narrative has fundamentally changed within just a few years. Young university graduates now report sending out dozens of applications without receiving any response. Companies are freezing hiring plans. Internships are less frequently leading to permanent positions. And the stark figures paint a worrying picture: Unemployment in Germany rose to an average of 2,948,000 people in 2025, an increase of 161,000 compared to 2024, and the unemployment rate climbed to 6.3 percent. This marks the third consecutive year in which unemployment and underemployment have increased.

How can a country that has been desperately seeking workers for years simultaneously have more than three million people unemployed? This question is not merely rhetorical. It touches upon the core of what is structurally wrong with the German economy.

A market splits: shortage here, surplus there

The apparent contradiction dissolves as soon as one stops viewing the German labor market as a single entity. It isn't one. It's a mosaic of submarkets developing in completely opposite directions – and with hardly any connections between them.

On the one hand, there is a persistent shortage of skilled workers in nursing, medicine, trades, construction, logistics, and social professions. It's not just any workers that are lacking, but specialists with specific qualifications and physical stamina who can't be trained overnight. Early childhood educators, electricians, nurses, and plumbers – these were the most sought-after professions on Germany's major job platforms in 2024. Stepstone even recorded significant increases in advertised entry-level positions in the education and trades sectors: up 96 percent in education and up 52 percent in trades.

On the other hand, there is a structural oversupply in traditional office jobs, administrative roles, entry-level IT positions, and large parts of industrial clerical work. Demand has plummeted, particularly in those areas many university graduates aspire to after their studies—marketing, human resources, sales, administration, and controlling. The number of entry-level positions advertised on Stepstone in the first quarter of 2025 was 45 percent below the five-year average and even below the level of the first months of the pandemic. Entry-level positions in sales fell by 56 percent, in human resources by 50 percent, and in administration by 34 percent.

The German Economic Institute (IW Cologne) reported in March 2025 that, for the first time since the end of the COVID-19 pandemic, there were more skilled unemployed than job vacancies: 1.24 million skilled unemployed compared to only 1.15 million job openings. While the demand for skilled workers fell by 5.1 percent compared to the same month of the previous year, the number of skilled unemployed rose by 10.2 percent. This turning point marks the end of an era.

Demographics as the backdrop to a contradictory drama

The timing of this development is particularly significant given the demographic shift, which in Germany is no longer an abstract future phenomenon but a tangible present. According to the 16th coordinated population forecast by the Federal Statistical Office, by 2035 one in four people in Germany will be 67 years or older. The baby boomer generation is in the midst of transitioning from working life to retirement, while significantly smaller cohorts are entering the workforce.

The working-age population will decline by almost 20 percent from 51.2 million to 41.2 million by 2070, even under moderate growth conditions. High levels of immigration can only mitigate this decline, not prevent it. Current projections indicate that the working-age population will decrease by at least four million people by 2070. Therefore, the medium-term demand for skilled workers is not merely a theoretical construct, but rather a virtually inevitable demographic reality.

It is precisely this structural scarcity that makes the current situation so worrying. A shrinking working-age population should actually ease the pressure on the labor market, making skilled workers scarcer and therefore more sought after. Instead, the number of unemployed is rising. This is not a normal cyclical fluctuation. It is a sign that the economic structure is developing cracks in the wrong places.

The industrial base is crumbling faster than expected

To understand the core of the problem, one must look at German industry. For decades, it was the center of gravity of the employment model: strongly protected by collective bargaining agreements, productive, well-paid, and closely interwoven with regions, suppliers, and service providers through dense supply chains. Now this foundation is crumbling.

The auditing firm EY documented that German industry alone cut around 124,100 jobs in 2025. This is almost double the already high figure of 56,000 job losses in the previous year. Since the pre-crisis year of 2019, a total of 266,200 industrial jobs in Germany have been lost without replacement, a decline of 4.7 percent.

The situation in the automotive industry is particularly alarming. In 2025 alone, almost 50,000 jobs were lost there. Since 2019, the automotive sector has lost around 111,000 jobs, representing a decline of 13 percent. In mechanical engineering – the second core sector of the German export economy – companies employed around 22,000 fewer people at the end of 2025 than in the previous year, and the industry association VDMA predicted this trend would continue in 2026. The reasons are well-known and are acting like a storm from several directions simultaneously: high energy prices as a result of the war in Ukraine, increasing Chinese competition in global markets, US trade tariffs, weak export demand, and the technological shift to electromobility, which is fundamentally changing operational processes and qualification profiles.

What's easily overlooked in these figures is that industrial jobs aren't isolated points on an employment map. They're anchor points in a regional economic structure. When a large factory closes or cuts jobs, suppliers, canteens, laundries, auto repair shops, and local retailers also lose revenue and ultimately jobs. The multiplier effects of industrial employment are substantial – and their loss is harder to compensate for than the raw job figures suggest.

The silent hiring freeze: The silence of the empty chairs

While factory closures generate public attention, the more far-reaching adjustments largely take place behind the scenes. German companies avoid legally and socially costly mass layoffs wherever possible. Labor law, collective bargaining agreements, and institutionalized co-determination make redundancies politically sensitive and financially expensive. Instead, the contraction of the job market occurs through other channels: hiring freezes, expiring fixed-term contracts that are not renewed, phased retirement programs, voluntary severance packages, and the simple decision to no longer advertise vacancies.

The result is clearly visible in the IAB data. In the first quarter of 2025, there were 1.18 million job vacancies nationwide – a decrease of approximately 390,000, or 25 percent, compared to the first quarter of 2024. In the second quarter of 2025, the number fell further to 1.06 million, and in the third quarter to 1.03 million – 246,100 fewer than a year earlier. The vacancy rate, which reflects the ratio of immediately available vacancies to total personnel demand, fell from 3.4 percent in the first quarter of 2024 to 2.6 percent in the same period of 2025.

In the first quarter of 2025, there were an average of 251 registered unemployed people nationwide for every 100 job openings – 74 more than in the same quarter of the previous year. Competition was even more intense in eastern Germany, where there were an average of 330 applicants for every 100 positions. For those left out, this means intensified competition for every entry point into the job market.

At the same time, short-time work acts as a buffer for existing employees. In 2025, an average of around 300,000 people received short-time work benefits. In January 2025, according to preliminary projections, this figure was around 240,000. The instrument thus functions like a hidden hiring freeze: companies that rely on short-time work do not hire new employees. The existing workforce is retained, and the market for new hires remains frozen.

Young professionals as the main victims of a system reset

While the crisis may initially have only a muted effect on many employees, it is hitting young professionals with full force. This is inherent in the system: In times of economic uncertainty, companies first reduce spending on the least binding positions. And these are junior positions that have not yet been filled.

Anyone fresh out of university today looking to enter a traditional office job faces a market that has changed drastically in just a few years. One applicant profiled by the Financial Times, despite her academic qualifications, international experience, and general suitability for the modern service sector, was still searching for a permanent position after more than 120 applications. This account is not an isolated incident, but rather a structural symptom.

The Stepstone analysis confirms the systemic dimension: In the first quarter of 2025, the number of advertised entry-level positions was 45 percent below the five-year average and even below the level of the first months of the pandemic. Traditionally administrative and data-processing roles such as sales, human resources, and administration are particularly affected. Longer application processes exacerbate the situation: Applicants now wait significantly longer for feedback, which is not only psychologically stressful but also delays their practical entry into the job market.

Behind this decline, in addition to economic headwinds, lies a deeper structural phenomenon: the increasing automation of entry-level tasks in office and administrative professions. The very tasks that traditionally served as the first step in a career for new employees—data maintenance, customer communication, appointment scheduling, routine analyses—can now be handled more efficiently by AI-supported systems. According to the World Economic Forum's Future of Jobs Report 2025, 93 percent of German companies expect their business models to fundamentally change by 2030 due to AI and digital information processing. IAB researchers predict that up to 800,000 jobs in Germany could be lost to AI in the next 15 years—although a similar number of new jobs are expected to be created during the same period. The crucial difference: the job losses are concentrated precisely in those entry-level positions that are currently shrinking the most.

The public sector trap: Growth at the wrong end

A closer look at employment statistics from recent years reveals another paradox: While overall employment remained stable or even slightly growing for a long time despite economic weakness, this growth came disproportionately from the public sector. Public services, education, and healthcare recorded increases even during the economic downturn, while industry and construction were already experiencing declines by 2024.

Clemens Fuest, head of the ifo Institute, has succinctly described this structural imbalance: Job creation is primarily taking place in the public sector, while jobs are disappearing in industry. This is particularly critical for Germany because industrial jobs are typically more productive, better paid under collective bargaining agreements, and more regionally integrated than public service jobs. While the public sector can provide a social safety net, it does not produce exportable goods and does not generate the same added value as the manufacturing sector.

The Handelsblatt newspaper succinctly summarized the dilemma: The rising employment figures of recent years were deceptive. They masked a profound shift from highly productive industrial activities to less productive services and publicly funded positions. Such a shift is not neutral for the tax and social security system: If the proportion of jobs that are net contributors to social security shrinks, while the proportion of jobs funded by these funds grows, a financial imbalance will arise in the medium term.

Our EU and German expertise in business development, sales and marketing - Image: Xpert.Digital

Industry focus areas: B2B, digitalization (from AI to XR), mechanical engineering, logistics, renewable energies and industry

More information here:

• Expert Business Hub

A thematic hub offering insights and expertise:

• Knowledge platform covering global and regional economies, innovation and industry-specific trends
• A collection of analyses, insights, and background information from our key areas of focus
• A place for expertise and information on current developments in business and technology
• A hub for companies seeking information on markets, digitalization, and industry innovations

The regional imbalance: When a crisis is unequally distributed

The German labor market is deeply divided not only by occupation but also by region. While metropolitan areas like Munich, Hamburg, and Frankfurt, with their diversified mix of industries, are better able to absorb shocks, the industrial crisis is hitting structurally weak regions with monofunctional economic structures particularly hard. Places that for decades relied on a single large automotive supplier or machine manufacturer now face a dual challenge: declining employment and a lack of alternative employers.

The BVR study "Regions 2035" reveals significant regional differences in demographic development: While cities like Leipzig, Potsdam, and Landshut are growing, many rural districts in eastern and central Germany are losing residents. It is precisely in these areas that the old-age dependency ratios are highest and the labor force participation rates lowest. In eastern Germany, in the first quarter of 2025, there were an average of 330 registered unemployed for every 100 job vacancies – significantly more than in western Germany, where the figure was 234. This reflects not only economic weakness but also the lingering structural repercussions of German reunification, which, three decades later, have still not been fully overcome.

In spring 2026, the ifo Institute warned that the decline in industrial value creation in Germany goes far beyond mere cyclical downturns: production and value creation are falling, investments are declining, and jobs are being permanently lost. The regional concentration of these losses in already structurally weak areas risks social upheaval that the state can at best mitigate, but not cure, with transfers and subsidy programs.

The pressure of the pincers: Costs, energy and global competition

Behind the job statistics lies a cost logic that forms the basis for decision-making for many companies. Germany remains one of the most expensive industrialized nations in the world when it comes to labor. Unit labor costs, social security contributions, bureaucratic regulations, and energy prices have all developed unfavorably in recent years. The Russian war of aggression against Ukraine caused European gas prices to skyrocket to unprecedented levels, and while they have since partially normalized, the level for energy-intensive industries is still significantly higher than that of their international competitors.

In its 2025 report on Germany, the OECD attested to the severe challenges facing the export-oriented German economy due to the cumulative effects of the COVID-19 pandemic, the Ukraine energy crisis, and increasing trade tensions. Structural reforms, the OECD stated, are urgently needed – simplification of planning law, acceleration of the digitalization of public administration, and reform of the pension, healthcare, and long-term care systems. The shortage of skilled workers threatens to become a significant obstacle to economic growth and the ecological and digital transformation.

At the same time, the competition isn't standing still. Chinese manufacturers, once welcome partners as buyers of German industrial goods, have become serious competitors in numerous segments – from electric vehicles and solar modules to industrial machinery. This structural change in global trade is not a temporary economic downturn, but a tectonic shift in production and technological expertise. German companies are responding by relocating production abroad, which is putting additional strain on the domestic job market.

What politicians should do now – and why they often don't

Against this backdrop, it is no coincidence that the Federal Employment Agency concluded its 2025 annual review with the cautious hope that the worst might be over. This sounds like a formulation that reflects more wishful thinking than analysis. Because the forces currently weighing on the German labor market cannot be reduced to a single bad year for the economy.

Labor market experts see three key levers that policymakers urgently need to pull. First: faster and broader continuing education. While Germany has instruments in this area, their use lags behind demand. The 2026 federal budget does, at least, foresee an increase of €690 million in the Federal Employment Agency's continuing education budget, a rise of 20 percent. This is a signal, but not a breakthrough. Continuing education alone won't solve the problem as long as there's a lack of demand for certain qualifications or as long as businesses don't invest sufficiently.

Secondly: better placement in shortage occupations. Someone who has worked in accounting for decades and whose job is replaced by software needs more than just a course to become a nurse or electrician. Career change in midlife is possible, but it requires patience, government support, and social recognition. Both are still insufficiently developed in Germany.

Thirdly: Investment stimulus. As long as companies remain reluctant to invest, no new jobs will be created. The German Institute for Economic Research (DIW) pointed out in autumn 2025 that the current economic upswing, which is emerging for 2026, is primarily driven by increased public demand and not by the actually necessary strength of the manufacturing sector and the export economy. A debt-financed government stimulus may help in the short term – but it does not remedy structural competitive weaknesses.

The qualification gap: When good degrees are no longer enough

The situation of university-educated applicants deserves special attention. On the one hand, it remains true that university graduates are significantly better positioned on the German labor market than those with lower qualifications. The unemployment rate among university graduates was only around 3 percent in 2025, while the overall rate was 6.3 percent. On the other hand, this average figure masks considerable internal differences based on field of study, specialization, and career entry point.

Those who have studied medicine, computer science with a relevant specialization, engineering in in-demand fields, or nursing science still find employment quickly. However, those entering the job market with a bachelor's degree in business administration, communication studies, sociology, or similar broad fields of study now face significantly tougher competition. The job market has stopped absorbing every qualified applicant; it now selects more rigorously based on the type of qualification.

This development has far-reaching consequences for the higher education system. For years, the expansion of the number of university graduates was politically desired and viewed positively by society. The logic was that those who studied had better opportunities. Now it is becoming clear that this statement requires an important qualification: what matters is what one studied – and whether the economy actually offers corresponding positions at the time of graduation.

Short-time work as a smokescreen: When does the buffer end?

Short-time work is one of the central instruments of German employment policy and has proven its stabilizing effect in past crises. During the financial crisis of 2008/2009 and the COVID-19 pandemic, short-time work benefits prevented mass layoffs and enabled companies to retain qualified staff. This mechanism has proven its value.

But short-time work has a weakness: it preserves the status quo without promoting structural change. A company that retains its core workforce through short-time work has less incentive to invest in restructuring and realignment. For job seekers, short-time work means fewer job openings, because existing positions are filled by employees on short-time work who are retained instead of new applicants being hired. The 240,000 to 300,000 people who regularly received short-time work benefits in 2025 are not considered unemployed from an employment statistics perspective. But from the perspective of labor demand, they are de facto temporarily removed from the production process – with significant consequences for the signaling effect of the job market.

New hope through infrastructure initiatives? Opportunities and limitations

Since spring 2025, the new German government has increasingly relied on a state-funded investment boost, made possible by the reform of the debt brake. Defense spending, infrastructure programs, and industrial policy support measures are intended to stimulate the economy and create jobs. In theory, the construction sector, the defense industry, and infrastructure service providers could particularly benefit from these impulses.

In practice, however, it takes considerably longer for public investments to actually generate employment. Planning and approval processes, which the OECD has already criticized, delay implementation. Furthermore, state-funded job creation in infrastructure and defense does not directly replace the industrial jobs lost in the automotive and mechanical engineering sectors. The required qualifications and regional distributions are too diverse.

The DIW (German Institute for Economic Research) predicted a fiscally supported upswing for 2026, but also warned that this upswing would be atypical: it would not be driven by exports and industry, but by public demand. For the labor market, this means that improvements are possible, but they will be segmented – some occupational groups and regions will benefit, while others will continue to stagnate.

Lessons from change: What the German labor market needs now

The current situation of the German labor market is not a temporary economic downturn after which everything will return to the way it was before. It is a symptom of an economic transformation that will extend over several years and require significant adjustments from companies, employees, and policymakers alike.

First, Germany needs a more honest education policy. The expansion of academic education must be linked to a realistic assessment of labor market needs. At the same time, non-academic training pathways must be given greater social value – including financial compensation. Tradespeople, caregivers, and technicians are not the losers of the education system, but rather the pillars of a modern welfare state. The fact that their professions are still valued less than a bachelor's degree in many parts of society is a cultural weakness with economic consequences.

Secondly, Germany needs a more ambitious labor market policy. Increasing the continuing education budget by €690 million in the 2026 budget is a step in the right direction, but not enough. The mismatch between the available skilled workforce and the number of filled positions will only decrease if continuing education programs are more targeted, faster, and offer stronger incentives for both companies and employees.

Thirdly, Germany needs an investment strategy that is not solely based on government demand, but also mobilizes private investment. Reducing bureaucracy, ensuring reliable energy prices, and establishing predictable framework conditions are not neoliberal demands, but simply prerequisites for companies to want to create jobs again in one of the world's most expensive business locations.

No return to the Hartz IV era – but a genuine structural crisis

It would be wrong to equate the current situation with the German employment crisis of the early 2000s. Back then, more than five million people were unemployed, the social security systems were under acute financial pressure, and the term "Sick Man of Europe" was no exaggeration. Employment is significantly higher today, the institutional mechanisms of the labor market are more stable, and demographic shortages in certain professions remain a reality.

But the current trend reversal is nonetheless serious – and in some respects more telling than the 2005 crisis. Back then, the working-age population didn't shrink. Today it does. Back then, there was no ongoing AI-driven wave of automation in office jobs. Today there is. Back then, the structural strength of German industry was still largely intact. Today it is crumbling. And despite all these stressors, unemployment is rising – signaling that even an aging country with a shortage of skilled workers doesn't automatically generate sufficient demand for the qualifications that many unemployed people possess.

The apparent contradiction between a shortage of skilled workers and rising unemployment is therefore not a paradox. It is the profoundly logical consequence of an economy undergoing transformation on several fronts simultaneously: demographically, technologically, structurally, and cyclically. Anyone who understands this also understands why the solutions cannot be simple.