Employment and Output Responses to the Current Crisis

1. Employment and Output Responses to the Current Crisis Jonathan Perraton University of Sheffield, UK

2. (Semi) Official View • “There are four different European social models, each with its own performance in terms of efficiency and equity. The Nordic and the Anglo-Saxon models are both efficient, but only the former manages to combine equity and efficiency. The Continental and Mediterranean models are inefficient and unsustainable; they must therefore be reformed.” – Andre Sapir (2006: 369; co-author, 2003 Agenda for a Growing Europe Report) • “In practice there are few feasible policy combinations to achieve satisfactory employment outcomes…. There have been two demonstrably successful broad policy packages in the recent past: one way is to emphasise product- and labour-market flexibility, though it may imply income inequalities… another way combines flexibility with security, but is more expensive” OECD – update on Jobs Strategy: • http://www.oecd.org/document/1/0,3343,en_2649_33927_38939649_1_1_1_1,00.html

3. Stylised Facts • Generalised falls in output since onset of ‘Great Recession’ • Variations in changes in unemployment rates and no systematic relationship with changes in output • Closing of EU-US unemployment gap; European unemployment rates had been falling before downturn • Relatively strong Nordic performance • Ambiguous as to whether relative success stories share common determinants • Historically, financial crises typically associated with large and persistent rises in unemployment

6. Output Falls • Largest typically associated with either housing market imbalances or trade surpluses • Housing market imbalances also associated with rise in budget deficit • High welfare expenditure not associated with rises in debt position • No clear relationship with countries’ banks’ exposure to US ‘toxic assets’

7. Standard Explanations of Unemployment Response • Various attempts to fit Okun’s Law explanations to explain outcomes • Historic data; differences not well explained by priors. Priors of higher elasticity, more flexible labour markets - weak relationship with labour market institutional variables; more general limitations of institutions-unemployment relations • Further, weak relationship between expected and actual  unemployment from output on (historic) Okun law elasticities

8. Standard Presumed Mechanisms • Labour hoarding induced by EPL and/or firm-specific human K; risks of productivity falls, rising unit labour costs and jobless growth with recovery • Some evidence of such effects in countries with established short-time working arrangements • Nordic country adjustment patterns appear to differ – stronger outflows from unemployment (contrast to low inflows to unemployment countries)

9. Unemployment Rates

10. Employment Rates

12. Provisional Implications • Labour markets have worked relatively well in Nordics; post-1990s crisis reforms to financial systems relatively effective • Official (e.g. OECD) reports highlight dangers of lack of wage adjustment and advocate decentralisation; negative effects not (yet?) apparent – test case for wage-led growth? • Fiscal stabilisers effective, reducing reliance on monetary policy (effectiveness?) – latterly tightening of MP in Norway and Sweden • Potential role for macro policy autonomy? E.g. Norway’s different (and more flexible) inflation target than ECB