Unemployment has fallen significantly prior to the crisis, not least due to past labour market reforms, and has remained surprisingly stable during this recession – both relative to past experience and vis-à-vis other OECD countries. This is primarily explained by more flexible working time arrangements, but the government’s subsidized short-time work scheme as well as voluntary labour hoarding due to prior skill shortages also played a role. Due to strict employment protection of regular jobs the burden of adjustment so far fell on the less-well protected workers. Going forward, labour market policy needs to adjust to the likely increase in unemployment which will result as firms try to regain their competitiveness. The key challenge is to prevent the build-up of long-term unemployment and to lower the strictness of employment protection legislation for regular job contracts to better allow for structural change in the economy.