What explains the German Employment Miracle in the Great Recession?

1. What explains the German Employment Miracle in the Great Recession? Jennifer Hunt Rutgers University Michael C. Burda Humboldt-Universität Berlin DNB/IMF workshop “Preventing and Correcting Macroeconomic Imbalances in the Euro Area, Amsterdam, October 2011

2. Outline • What is the „German Employment Miracle“? • What are the facts? A bird´s eye perspective • German labor market performance: an accounting exercise • Econometric evidence • Interpretation: New and old labor market institutions • Conclusions

3. Whatdoesthishaveto do withimbalances? • Divergence in current accounts balances since the 1990s • Divergence in unit labor costs • Divergence in unit labor costs have deteriorated the most in sheltered sectors such as services • Germany as “Musterknabe” – or “böse Bube”

4. Unit laborcosts, cumulativechange, 1999-2008 D A SF F B NL I L P E EL IRL

5. Unit laborcosts, cumulativechange, traded vs. nontradedgoods, 1999-2008 handelbar nichthandelbar D A SF F B NL I L P E EL IRL

6. Preview of central findings • The German labor market „miracle“ was achieved by a drop in hours per worker and in productivity per worker, and not by a reduction in labor force • Conditional behavior of hours per employee not unusual given the output drop and wage moderation • About 60% of the „missing layoffs“ in 2008-9 is explained by missing hires in 2005-8 (pessimistic expectations) and wage moderation • Working time accounts (Arbeitszeitkonten) increased the sluggishness of employment by increasing relative adjustment costs

10. Facts • Sharper drop in output (GDP) than in US • Employment, unemployment hardly changed • Drop in hours worked, but not as much as output • Drop in hours/employee

11. Decomposingthecollapseofoutput

12. Extensive v. Intensive Margin

16. Summary of Facts • Sharp drop in economic output (GDP) • Drop in hours worked • Drop in hours/worker, but not extraordinary • Drop in hourly productivity (is extraordinary) • Wage moderation in trend, but spike at the time of the crisis and later return to trend, also relative to productivity – seems „too late“

22. Comparison: US

23. : US

24. US: Construction US: Manufacturing Actual employment Actual employment

25. US: Trade US: FIRE Unlike Germany, US suffered large job losses in manufacturing, as well as in construction and in FIRE (finance, insurance, real estate)

26. Potential Explanations • Kurzarbeit (short-time work) • Concession bargaining (Arbeitszeitkorridore) • Increasing flexibility of employment, temp agency work • Working time accounts (Arbeitszeitkonten) as mechanism for gross wage reduction while creating senior firm liability (accrued wages) • Wage and nonwage cost moderation

27. Facts • How important was (Kurzarbeit) short-time work? Answer: Important, but not significantly different from past severe recessions

28. German unification and the collapse of the East German economy

29. Facts • Howimportant was outsourcingofworkbywayoftemporaryworkagencies (the „cheap“ extensive margin)? Answer: Importantwayforfirms (esp. in manufacturing) tovaryemploymentwithoutvaryingtheirheadcount (whichinsteadisattributedtobusinessservicesector „unternehmensnahe Dienstleistung“): Tempworkdroppedsharply in therecession, but also rosesharply in thepreceding boom Yet: itdoesn‘tappearto matter muchfortheaggregateoutcome

30. Die Zeit, 10.2.2011

33. Explanations: Summary • Kurzarbeit (short-time work): Not exceptional • Concessionbargaining (Arbeitszeitkorridore): not exceptional • Working time accounts (Arbeitszeitkonten) assenior firm liability: importantas a substituteforgovernmentsubsidizedshort-time) • Wage moderation: Yes, possiblyinfluencedbythe Hartz reforms • Wecanexplain 60% ofthe „miracle“ with wage moderationandlowemploymentgrowth in previous boom –therestlookslikeregimechange

34. Model-theoretic considerations • Manyofthefeaturesofthisdiscussioncanbecapturedby a standard partial equlibrium model • Profit maximizationproblem: Chooseemployment {Lt} andhours per worker {t} tomaximize - subject to Y=f(Ht) with hours Ht=Ltt and f ´>0, f ´´<0; - taking the sequences of base wage {Wt} and output price {Pt} as given; - ()>0, ´()0, ´´() >0 „average effective wage premium“

35. Implications • Model suggestscurrentandfutureproductwages (andimplicitlydemandconditions) areimportant • The costofadjusting extensive marginoflabor (employees) relative tothecostofadjusting intensive margin – regimechange? • Model also suggestsexpectationsaremoreimportant, thehigherthe extensive marginadjsutmentcostsare • Howimportantwerethey? • Fact: Business expectationswereunusuallypessimisticin theyears 2005-6, despite a typicaloutputexpansionand positive labormarketdevelopments (unemploymentfalling, employmentrising)

39. C X Z G I

40. Conclusions • German output declined as much as in the US but hours worked fell by less, so hourly productivity declined too • The drop in total hours is accounted almost fully by hours worked per employee • Short time working was not extraordinary, given past recessions • Working time accounts, temp employment and wage moderation were important, latter possibly accelerated by the Hartz reforms • Expectations played a large role – cautious hiring in the previous upswing can „explain“ 41% of the missing job losses – wage moderation perhaps another 20%. Rest is regime change • Hypothesis: Germans have permanently increased their normal working hours: A result of the Hartz reforms?

41. What explains the German Employment Miracle in the Great Recession? Jennifer Hunt Rutgers University Michael C. Burda Humboldt-Universität Berlin DNB/IMF workshop “Preventing and Correcting Macroeconomic Imbalances in the Euro Area, Amsterdam, October 2011