Global labor markets in the global financial crisis..

An excellent note by FRBSF econs – Mary C. Daly, John Fernald, Òscar Jordà, and Fernanda Nechio.

They look at the labor markets in key economies in the world both pre and post crisis. They find these labor markets had converged pre-crisis but have differed post-crisis.This is because of policy interventions.

The impact of the global financial crisis on labor markets varied widely from country to country. In the United States, the unemployment rate nearly doubled from its pre-recession level. The rate rose much less in the United Kingdom and barely changed in Germany, despite larger declines in gross domestic product. Institutional and technological changes since the 1970s had previously made relationships between output and unemployment more homogeneous across countries. But the global financial crisis undid much of this convergence as countries adopted different labor market policies to adjust output.

They divide this divergence in labor performance across three factors:

During and since the Great Recession, countries have adjusted all three factors, but have placed different emphasis on them. The U.S. adjustment was largely in line with its pre-recession experience of reduced employment, falling work hours, and increased productivity. By contrast, in the United Kingdom, the declines in employment, hours, and productivity were larger than in the pre-recession period. Compared with the United States, the main difference was that Britain adjusted productivity far more. In Germany, the pre-and-post-crisis responses were notable. Both hours per worker and productivity fell much more following the crisis, explaining why Germany saw big output changes during the crisis and recovery period with relatively little change in the unemployment rate. This partly reflects Germany’s widespread adoption of procedures that permitted employers to adjust worker hours easily (Burda and Hunt 2011). 

Germany, the United Kingdom, and the United States are good examples of three ways businesses in advanced economies responded to the global financial crisis. In Germany, the pattern reflects explicit policy decisions. In other countries, the reasons for the differences are less clear. In all cases, the differences among countries in the methods businesses used to adjust output are directly reflected in the path of each country’s unemployment rate.

Excellent stuff..

 

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