German chancellor Angela Merkel's cabinet agreed today to extend a part-time work scheme that encourages firms to pare back the hours of their employees rather than fire them.

The scheme, known by its German name "Kurzarbeit", has played a significant role in keeping the labour market stable through the country's worst downturn since World War Two.

Unemployment in Europe's largest economy has declined for the past four months, although layoffs are expected to pick up in 2010, pushing up the jobless rate, which stood at 8.1 per cent in October on a seasonally-adjusted basis.

The government extended the scheme, under which the government subsidises workers on reduced hours, by one year until the end of 2010.

Starting next year, the amount of time companies can make use of the scheme will be reduced to 18 months from two years.

"The Kurzarbeit scheme has proved to be an effective instrument for preventing job losses during the crisis," government spokesman Christoph Steegmans said.

"The economy is gaining momentum but preserving jobs in 2010 remains a challenge and therefore the government believes an extension of the period during which Kurzarbeit can be used is justified."

The Labour Office, which runs the scheme for the government, is expected to spend over €5 billion on it this year.

Earlier this month, the head of the Labour Office Frank-Juergen Weise said the scheme might be giving workers false hopes they would return to full-time work at a later date and that it could merely be delaying a wave of layoffs.

Reuters