Most Continental European labour markets and welfare states have experienced a substantial transformation. Germany is a case in point as it exhibits increasing levels of employment and a growing share of low pay and non‐standard work. The article claims that changes in labour market institutions play a major role, but changes in industrial relations at the sectoral level and individual firms' staffing practices are equally important. Regarding labour market institutions, the pattern found in Germany shows sequences of reforms addressing the margins of the labour market and contributing to a growing dualization of employment. This dualization trend was reinforced by micro‐level dynamics in industrial relations and company employment practices, where we can observe growing reliance on mechanisms of internal flexibility for the skilled core workforce and increasing use of non‐standard types of employment in less specifically skilled occupations, in particular in the private service sector. Hence, the adjustment of the German model can only be understood by taking into account the interaction of policy change and actors' adaptive behaviour.