Figures released by Germany’s Federal Labor Office on Thursday showed unemployment in the world’s third largest economy dropped by around 38,000 in August from the previous month. But with 4.313 million jobless, there were still almost 300,000 more people without work than a year earlier.

Chalked up to employment centers more actively pushing the unemployed for job placement, the monthly drop was larger than many economists had expected. But the Labor Office warned against reading too much into the August figures and as if to highlight the “underlying stagnation” on labor market, the unemployment rate remained unchanged at 10.4 percent.

“We don’t expect an improvement of the labor market before the second quarter of 2004 and only when there’s an acceleration of the recovery in the second half,” Florian Gerster, head of the Nuremberg-based Labor Office, said at a press conference on Thursday. “And even then there won’t suddenly be a truly mentionable amount.”

The number of unemployed in Germany adjusted for seasonal factors remained unchanged in August, at 4.407 million people. Economists often put more stock in the seasonally adjusted figures because they smooth out the sharp changes that occur due to weather and holidays.

Five million jobless this winter?

Some observers fear German joblessness could crack the five million mark this winter, when the labor market traditionally sheds jobs. “With the current state of the economy one has to actually assume it will be hit,” Rainer Schmidt from Kiel’s World Economic Institute told Der Spiegel magazine. “If job placement efforts work then maybe five million won’t be breached. But we’ll certainly get close to this level.”

But the Labor Office’s Gerster said the politically sensitive figure could be avoided if conditions remained favorable. “So long as we don’t have a hard winter, we’ll stay below five million,” he said.

With Germany’s economy stuck in recession the first six months of 2003, Gerster and other officials are pinning their hopes on a recovery in the second half of the year. However, even though there appear to be first signs that economy has put the worst behind it, growth this year and next are likely to be modest at best.

German Chancellor Gerhard Schröder’s center-left coalition is betting the farm on his so-called "Agenda 2010," a package of welfare cuts and labor market reforms aimed at reviving the lackluster economy and reducing the country’s chronically high unemployment. But the conservative opposition and many economists worry the reforms do not go far enough to truly shake up Germany’s stagnant labor market.