A Roadmap to Reducing Cost of Failure in Germany: Legislative Agenda, Impact Analysis, Transition, and Senior Workers Employability

Yann Coatanlem

No 59, EconPol Policy Reports from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: In order to close the competitiveness gap between the U.S. and Europe, particularly in fast-moving technology sectors, firms must have the ability to take elevated risks and reorganize workforces rapidly. However, Germany's strict employment protection regime makes corporate restructuring exceptionally costly. The high “cost of failure” discourages risk-taking, stifles disruptive innovation, and structurally penalizes hiring senior workers. How much does this rigidity actually cost employers, and how can it be mitigated without unraveling Germany's foundational labor protections?To answer these questions, the author of this report constructed a bottom-up cost model using a dataset of 55 large German restructuring programs announced between 2008 and 2025, covering roughly 150,000 paid exits. The findings are striking: the average cost per exit of restructuring equals 2.49 times an employee's annual salary, driven primarily by expensive early retirement packages and lengthy procedural delays.Addressing this barrier requires targeted legislative action rather than wholesale deregulation. The report proposes a seven-amendment reform package specifically designed for senior high-earners (those with fixed pay above the social security contribution ceiling). By introducing formulaic capped severance, condensing works council notifications to a seven-day window, and shifting incentives away from early retirement, the central estimate suggests that average restructuring costs for this group could be reduced to 1.28 times their annual salary. These reforms, complemented by a Federal Senior Hiring Risk Pool to boost older workforce participation, provide a concrete roadmap to make German restructuring as agile as in flexible economies like Denmark and the U.S.

Date: 2026
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