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Germany’s Wanderjahr in the Labor Market and Lessons for the United States

In Economy on September 5, 2012 at 4:09 AM

Germany endured a large loss of 9 percent of GDP in 2009; however, somehow the country still managed to increase employment in that same year by 22 thousand individuals to the surprise of many. That is a 0.05 percent rise in Germany’s total employment level. What policy brought about this imperious, though seemingly small, violation of Arthur Okun’s law? And, why in Germany? Answer: work sharing, or what German’s refer to as Kurzarbeit.

The German wanderjahr in economics (not to be outdone by Albert Einstein’s 1905 Wanderjahr in physics), by all appearances and news coverage, has yet to merit attention and proper focus in the United States. Maybe it should be explored further here. After all, by contrast to Germany’s experience stated above, the United States over that same year’s time endured a relatively smaller loss of 2 percent of GDP only to witness the labor force largely collapse and lose 5.4 million jobs (-3.77 percent).

Labor disjunction in mind, as John Taylor, the Stanford University economics professor, and Martin Feldstein, the former NBER president, might jointly recommend, why not present a counterfactual exploring the divergences in national outcomes by labor results? Below, a single counterfactual will be explored, but only after reviewing the raw input/output data of a sample of the three largest economies as of 2008, i.e., Germany, Japan and the United States, made available to analyze courtesy of the IMF.

A Review of Three Nations’ Labor Results

Charts 1, 2 and 3 below paint a broad picture of the three large economies in question. Firstly, Chart 1 presents a Labor Index with 2008 = 100 and the underlying units representing total employed persons, sourced through the IMF. Secondly, Chart 2 indexes nominal gross domestic product as provided by the IMF. Lastly, Chart 3, which closely resembles Chart 2, presents information from the two prior charts as a Productivity Index, measured as income divided by labor, i.e., nominal GDP divided by total employed persons. Note: Data provided for 2012 represents IMF estimates.

Chart 1

During the prior business cycle, which peaked in 2008, non-German large economies, e.g., Japan and the United States, suffered far greater dis-employment numbers yet benefited far lesser reductions in gross domestic product. For example, from 2007 to 2010 United States employment dropped -4.7 percent while Japan dropped -4.6 percent, with corresponding cumulative increases in real GDP over this time measuring 3.5 percent and 34.7 percent, respectively. In stark contrast, Germany boosted its hiring by 1.7 percent over this same time period, adding 713 thousand individuals to the payroll. Gross domestic product in Germany slowed by -1.2 percent at this time. As a result, productivity, measured as income divided by employment, responded according to expectation (see Chart 3). In summary, the United States raised productivity by 12 percent from 2008 to present and Japan raised productivity by 30 percent over this same time period. Germany, on the other hand, has deliberately forced this number down by program design.

Chart 2

Chart 3

As a result of these large productivity gains, employees that have managed to survive lay-offs to date are now likely part of a new overly stressed workplace. Bertrand Russell, the English philosopher, wrote about the merits of balancing labor/leisure in a past paper (Russell (1932)), one that seems especially relevant. With productivity burdens and benefits in mind, interestingly Chart 3 evidences that the German economy has increased net job hiring in the previous 8 years running.

Modularization of Fiscal & Monetary Decisions

Macroeconomic policy in Germany, stepping back for a moment, amounts to an explicit inflation target assigned for monetary policy, administered by the European Central Bank, and a dedicated fiscal policy ordered around implementing work sharing in the labor market. Coupled together with policies aimed at structuring VAT tax financing of the German government budget and retaining diversity of industry within the country (Zakaria (2011)), the total German experiment appears to add up and challenge even the robust Scandinavian economic models, e.g., Norway offering 12 months paid time leave for new parents and retaining a generally high standard of living while still managing to grow GDP per capita consistently. Were it not for the Euro Area debt repayment turbulence of the day, then German GDP, evidenced in Chart 2, may have yet already well recovered from the American sub-prime mortgage recession.

A summary of the German work sharing program is provided by Moller and Walwei (2009) and Crimmann, Wiebner and Bellmann (2010). In the latter paper, the authors explain, “Work sharing is a labour market instrument based on the reduction of working time, which is intended to spread a reduced volume of work over the same (or a similar) number of workers in order to avoid layoffs or, alternatively, as a measure intended to create new employment.” Retaining employees in this manner, as they further explain, beneficially preserves human resources within the companies, e.g., not requiring them to maintain expensive, ad-hoc search/hiring resources and re-training programs. “The First Crisis of Globalisation” is analyzed in full within both these papers, so they make for timely reading, with country-to-country comparisons provided in the former IAB paper. For additional reading more specific to employment determinants, Blanchard and Summers (1986) have empirically documented just how persistent unemployment levels are across many countries using ARMA(1,1); and Lord Jacob Mincer and Danninger (2000) have highlighted the root importance of human capital in serving as a proxy for earnings determination.

America’s Labor Market: A Work Sharing Counterfactual

If American industry was to have hypothetically adopted a work sharing program akin to that present in Germany and Austria in 2008, then what may have been the outcome for the labor market? Answer: they could have confidently expected, at minimum, to have saved greater than 6.1 million jobs that otherwise would have been shed between 2008 and 2010 (see Chart 4). By concentrating analysis solely on years when real GDP contracts, and by breaking from Okun’s suggested parity relationship, one can ascertain a counterfactual American work sharing result over these years fairly easily.

Chart 4

For instance, by concentrating on 2008 and 2009 data, i.e., the two years when real GDP growth turned negative in the United States, Moller and Walwei’s numbers suggest productivity re-allocations and working time adjustments more than adequately overcoming job losses associated with the registered GDP declines. In Germany in 2009, specifically, they estimated the job savings resulting from Kurzarbeit to have amounted to “the enormous sum of 3.2 million employed persons (or 8 per cent of persons in employment).” Therefore, counterfactual American job savings to be expected here would have measured greater than 6.1 million, i.e., 8.9 percent of the 2007 jobs level.

Other worthy options for radically improving American employment numbers are out there. Nobel Prize recommendations come from Edmund Phelps (2010), Columbia University professor, advocating creation of a First National Bank of Innovation, Federal Reserve governors proposing benchmarking monetary policy explicitly to a labor market measure; and Kenneth Arrow (2011), the Stanford University professor of economics, recommending a new approach for regulating banking and finance by viewing the market as inherently uncertain like that of the healthcare market.

Aside from Nobel Prize opinions, former Labor Secretary Robert Reich (2010) has advocated restructuring the break even analysis of unemployment insurance, i.e., “workers who lose their jobs and have to settle for positions that pay less could qualify for “earnings insurance” that would pay half the salary difference for two years; such a program would probably prove less expensive than extended unemployment benefits.” And, additionally, Jeffrey Sachs (2011), Columbia University professor of health policy and management, advocates human capital investment and non-human capital investment in order to improve the employment outlook for the United States over the long-run.

Another preventative recommendation may be to establish a stylized Rainy Day Fund for the labor market, i.e., a pre-recession funded counter-cyclical buffer allocated for labor unemployment insurance and job training that may be funded over time during expansion periods in the economy. Creation of such a fund could be structured in such a way to resemble an automatic stabilizer for the economy; thereby, preventing revolving considerations of ad-hoc, widely-heated debates regarding deficit spending programs ex-post recession.

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