Archive for November 4th, 2011

Stronger German labour markets – good policies or plain luck?

November 4, 2011

When other countries mainly US are reeling under high unemployment, German employment picture has actually improved. This has usually led to statements by economists praising Germany’s labor market policies.

In this short paper (voxeu articles are superb short papers, longer paper here), Michael Burda and  Jennifer Hunt explain the story is not as inspiring as it is made out to be. Their reason is during the export boom years of 2005-07, exporters did not employ many people as they did not expect the boom to last long. So, they had fewer people to begin with which led to much less firing in 2007 recession. It is as simple as that! All that talk about strong German labor polices and institutions is welcome but is not the story here.

First, the German labor market:

At a time when unemployment rates in France, Italy, the UK, and the US are stuck around 8%-9%, many are turning to the apparent miracle in the German labour market in search of lessons. In 2008–09, German GDP plummeted 6.6% from peak to trough, yet joblessness rose only 0.5 percentage points before resuming a downward trend, and employment fell only 0.5%. In August 2011, the standardised unemployment rate was about 6.5%, the lowest since the post-reunification boom of 20 years ago (Source: Bureau of Labour Statistics).

Reaction to this success has bordered on smugness in some quarters. Many have asserted that superior German labour-market institutions, particularly those facilitating reductions in hours per worker in a recession, were chiefly responsible for the miracle (Schneider and Graef 2010, Klös and Schäfer 2010, Möller 2010, German Council of Economic Advisors 2010). Yet these institutions have been in place for decades, so cannot explain why of five recessions since 1970, only the 2008–09 episode was not accompanied by plunging employment and a stubbornly higher unemployment rate. Recognising this, other German observers stress the continuing importance of reforms to the labour market enacted in 2003–05 (Gartner and Klinger 2010), and the absence of wage growth since 2001 (Boysen-Hogrefe and Groll 2010, Gartner and Klinger 2010).

They look at the reasons goven so far and dispute the evidence:

  • Did flexibility in hours per worker shield the labour market?
  • Does wage moderation explain the employment pattern?
  • A potential role for labour-market reforms
  • Expectations in the 2005–07 expansion

On the first, the point to some interesting labor management programs in Germany. In first short hours program, workers get paid based on short hours worked at their firms, and get the remaining day salary from the govt. Second a more interesting exchange program allows workers to exchange work hours with their employer and work more today for lesser work tomorrow. In this recession the second program seems to have helped more:

American observers are rightly intrigued by the system of short-time work used in Germany and certain other European countries (Boeri and Bruecker 2011, OECD 2010). Under this system, a firm in financial difficulties can apply to the employment agency for approval of a package whereby the firm reduces workers’ hours and variable pay in proportion and refrains from layoffs, while workers are reimbursed by the employment agency for 60-67% of their lost pay. Abraham and Houseman (1993) showed this system leads to more cyclical hours per worker and less cyclical employment than in the US. Hours per worker indeed fell precipitously in the 2008–09 recession, by almost 4%. Yet the hours of short-time work compensated were no greater than in the 1974–75 recession.

There is another factor which helps account for the significant reduction of hours during what many now call the ‘Great Recession’. A new personnel management tool, working-time accounts, has been used increasingly by German employers to adjust hours per worker flexibly to short-term fluctuations. Employers may increase hours above standard hours without immediate additional pay, as long as hours are reduced in the future with no loss of pay so as to keep average hours at standard hours within a moving time window. The number of hours the employer owes the worker is tracked in a working-time account. The share of workers with such an account rose from 33% in 1998 to 48% in 2005 (Gross and Schwarz 2007), possibly permitting greater adjustment of hours per worker in the 2008–09 recession than in earlier recessions.

What about labor reforms? They did help but the magnitude of shock of recession and negligible impact on employment is not explainable.

So the main explaination is expectations from 2005-07 boom. They were low and hence employment then was low:

We use the Ifo data to generate counterfactual expectations based on the historical relation between firms’ assessment of the current situation and expectations, and we use the counterfactual expectations to predict what the employment increase in the boom would have been had firms formed their expectations as in the past. We find that pessimistic employer expectations in the boom explain 56% of the missing employment increase, and hence 23% of the missing employment decline in the recession.

What are the implications from all this?

It would be heartening were institutions facilitating cuts in hours per worker able to eliminate employment declines in a recession entirely, but this does not appear to be the case. Rather, the extraordinary performance of the German labour market in 2008–09 can most clearly be tied to a possibly one-off event with less favourable social welfare implications. In other words, firms had less need to lay off than in a typical recession, because an unusual lack of confidence in the preceding boom had made them reticent to hire.


Also, may be the Germans and other country policymakers should have heard German exporters more that the boom will not last forever…

Linking economic growth with ethnic violence (hindu/muslim riots in India)

November 4, 2011

Anjali Thomas Bohlken of  University of British Columbia and Ernest John Sergenti of World Bank write this paper on the topic.

They say Indian states which grew faster from 1982 to 1995 experienced lower incidents of riots between Hindus and muslims. Infact the relationship is  strong:


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