Aug. 11,2004--FRANKFURT -- Germany's efforts to reduce worker benefits to stimulate Europe's largest economy are being tested by some of the biggest street demonstrations since the fall of communism.

Although government officials declined to be specific, their initial reaction to Monday's march by an estimated 40,000 Germans protesting unpopular cuts to unemployment benefits signaled a willingness to soften the impact of legislation intended to make Germany's rigid labor market more competitive.

In a shift, Franz Muentefering, the head of the ruling Social Democratic Party, and other officials of German Chancellor Gerhard Schroeder's governing coalition said yesterday they wouldn't rule out possible changes planned to take effect at the start of 2005 -- on the condition that it wouldn't further add to Germany's burgeoning budget deficit.

Meanwhile, Juergen Ruettgers, deputy chairman of the opposition Christian Democratic Union Party, yesterday called for a meeting with all major political parties to discuss the issue.

Many economists say the reduction in benefits -- which some have criticized as too timid -- is a vital first step to get Germany's economy up and running after a decade-long slump. "If Europe wants to emerge from the demographic challenges and globalization as a winner, then the pace of reforms must increase," Juergen Stark, vice president of the German central bank, told politicians in Berlin recently.

While the thrust of the new rules is likely to remain in place, the protests underscore the difficulty in Germany -- and across Europe -- of overhauling an economy that trails the U.S. and most developed economies in worker productivity and growth.

During the past few decades, German policy makers have tried to create jobs by limiting the number of hours individuals worked. Germans have among the industrialized world's shortest workweeks, averaging 35.7 hours, compared with 40 in the U.S. But Germany's unemployment rate is 10.6% of the population, compared with 5.5% in the U.S. Moreover, the country's job pool is shrinking, with vacancies down 19% in July from a year earlier.

In an effort to reverse the trend, Mr. Schroeder has pushed a series of overhauls dubbed "Agenda 2010." The most controversial change cuts unemployment benefits as an incentive to get people back to work. It was approved last month by the upper house of parliament.

At the same time, individual companies -- such as manufacturer Siemens AG -- have recently negotiated deals with employees to work longer hours for no extra pay. It is a break from national and industrywide wage agreements that have dominated Germany for decades.

Monday's protests were triggered in part by Germans' anger over provisions of the legislation that require them to fill out complicated forms on their financial situations. Unemployment payouts would then take into account the value of individuals' life-insurance policies, property, children's savings accounts and funds set aside for children's education.

Social Democratic Party officials said yesterday that possible changes up for negotiation are omitting savings accounts of minors and savings for education from the calculations.

Juergen Peters, chairman of the IG Metall union, yesterday called on the government to take the growing criticism seriously. The head of one of Europe's most powerful unions said improvements are necessary in the rules that impose low-wage jobs on qualified workers. Under the new rules, unemployed Germans would be required to accept a job well below their skill level or lose their benefits. "That's not the way to create the necessary and promised jobs," Mr. Peters said.

While many economists argue that the current legislation doesn't go far enough, they say Mr. Schroeder is unlikely to initiate any new overhaul efforts with national elections coming up in 2006 and after his party's poor showing in recent elections for state officials and the European Parliament.