Transcript What Explains the German Labor Market Miracle in the Great

Michael C. Burda
Jennifer Hunt
National Bureau of
Economic Research
Authors
 Michael C. Burda
 American macroeconomist at Humboldt University of
Berlin
 Director of Institute of Economic Theory
 Jennifer Hunt
 Professor of Economics at McGill University
U.S. Comparison
 German GDP fell 6.6 %
 US GDP fell 4.1%
 Unemployment rate for United States: 4.5 to 10.0 %
 Unemployment rate for Germany: 7.4 to 7.9%
United
States
Decline in
domestic
demand
Housing
Bubble
Germany
No housing
bubble
Collapse of
world trade
Background
 German government bailouts
 Dichotomy of export market
 Sluggish economy
 Explained by East Germany assumption of debt
 Higher payroll taxes
Lack of Confidence
 Uncertainty about recession’s duration
 Hired less than predicted
 Avoided costly layoffs
Wage Moderation
 Stagnation of wages from 2011 until 2008 after decades
of growth
 Decline in the power of labor unions
 Between ‘96 and ‘08, union coverage shrank 15%; wage
drift declined in 2000s
 Flexible working hours, Decentralization of pay
determination
Working Time Accounts
 Permit employers to avoid overtime pay
 Hours per worker must average the standard
 Provides disincentives for employers to lay off workers
in the downturn
 Increasingly common in union contracts
Statistics
 Departure from real GDP and change in
unemployment rate
 German firms reduced person-hours by less than US
 Reduction in working hours per worker
 Hiring practices in pre-2008 boom
German Labor Practices
 Short-time pay:
 German system: High firing costs, long severance notice
periods, government ST compensation
 American system: firing is low-cost, ST pay is rarely
 Firms could claim subsidies for up to 24 months instead
of 6
 Government assumed half of insurance costs
German Labor Practices
 Working Time Accounts:
 Share of workers with accounts: >50 %
 Average window of 30 weeks
German Labor Practices
 Uncompensated Hours Reduction:
 Opening clauses in union contracts
 Firms may take extraordinary measures in extraordinary
times
 No repayment of short-time losses, employee fixed costs
and SS contributions are reduced
 Hours reduction is limited to 15 %
Conclusion
 Both countries suffered worst post-war recession in
2008-2009
 Germany weathered through short-time pay, working
time accounts, and a pessimistic pre-2008 view
 Potentially interesting managerial decisions for the
United States