1. What explains the German Employment Miracle in the Great Recession? Michael C. Burda Humboldt-Universität Berlin 1 Jennifer Hunt Rutgers University 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 228. April 2015

3. What does this have to do with imbalances? 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” 28. April 20153

4. Source Brede (2011) 4 Unit labor costs, cumulative change, 1999-2008 D A SF F B NL I L P E EL IRL

5. Source Brede (2011) 5 handelbarnichthandelbar D A SF F B NL I L P E EL IRL Unit labor costs, cumulative change, traded vs. nontraded goods, 1999-2008

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 28. April 20156

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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 28. April 201510

11. 28. April 201511 Decomposing the collapse of output

12. 28. April 201512 Extensive v. Intensive Margin

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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“ 28. April 201516

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22. Comparison: US 28. April 201522

23. 28. April 201523 : US

24. 28. April 201524 US: ConstructionUS: Manufacturing Actual employment

25. 28. April 201525 US: TradeUS: 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 28. April 201526

27. Facts How important was (Kurzarbeit) short-time work? Answer: Important, but not significantly different from past severe recessions 28. April 201527

28. 28. April 201528 German unification and the collapse of the East German economy

29. Facts How important was outsourcing of work by way of temporary work agencies (the „cheap“ extensive margin)? Answer: Important way for firms (esp. in manufacturing) to vary employment without varying their head count (which instead is attributed to business service sector „unternehmensnahe Dienstleistung“): Temp work dropped sharply in the recession, but also rose sharply in the preceding boom Yet: it doesn‘t appear to matter much for the aggregate outcome 28. April 201529

30. 3028. April 2015 Die Zeit, 10.2.2011

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33. Explanations: Summary Kurzarbeit (short-time work): Not exceptional Concession bargaining (Arbeitszeitkorridore): not exceptional Working time accounts (Arbeitszeitkonten) as senior firm liability: important as a substitute for government subsidized short-time) Wage moderation: Yes, possibly influenced by the Hartz reforms We can explain 60% of the „miracle“ with wage moderation and low employment growth in previous boom –the rest looks like regime change 28. April 201533

34. Model-theoretic considerations Many of the features of this discussion can be captured by a standard partial equlibrium model Profit maximization problem: Choose employment {L t } and hours per worker {  t } to maximize 28. April 201534 - subject to Y=f(H t ) with hours H t =L t  t and f ´>0, f ´´<0; - taking the sequences of base wage {W t } and output price {P t } as given; -  (  )>0,  ´(  )  0,  ´´(  ) >0 „average effective wage premium“

35. Implications Model suggests current and future product wages (and implicitly demand conditions) are important The cost of adjusting extensive margin of labor (employees) relative to the cost of adjusting intensive margin – regime change? Model also suggests expectations are more important, the higher the extensive margin adjsutment costs are How important were they? Fact: Business expectations were unusually pessimistic in the years 2005-6, despite a typical output expansion and positive labor market developments (unemployment falling, employment rising) 28. April 201535

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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? 28. April 201540

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

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