Reducing unemployment: Lessons from Germany

Published on Real-World Economics Review Blog RWER (first on AlJazeera), by Dean Baker, April 1, 2013.

… The unemployment rate in Germany is 5.4 percent, more than two full percentage points below its pre-recession level. By contrast, even with the recent decline to 7.7 percent, the unemployment rate in the United States is still more than three full percentage points above its pre-recession level.  

The difference in labor market performance is even more striking if we look at the employment-to-population ratio (EPOP), which measures the percent of the population that is employed. Before the recession the EPOP for people between age 16 and 64 was roughly 5 percentage points higher in the United States than in Germany. In 2012 the EPOP for this age group in Germany was more than 5 percentage points higher than in the United States, making a total shift in Germany’s favor of more than 10 percentage points.

If you think this difference is explained by a booming German economy then you haven’t looked at the data. Growth since the beginning of the downturn has been almost identical in the two countries. From 2007 to 2012 Germany’s economy grew a bit more than 3.0 percent. The U.S. economy grew a hair less than 3.0 percent. The difference can’t come close to explaining the gap in labor market outcomes.

It is true that the United States has a more rapidly growing working-age population than Germany and therefore needs more growth to keep its unemployment rate stable. However this gap would still only explain a small portion of the difference in labor market outcomes.

The secret to Germany’s better outcomes is that the country has an explicit policy of pushing employers toward shortening work hours rather than laying off workers. A key part of this picture is the short work program, which is an alternative to unemployment insurance. With traditional unemployment insurance, when a worker gets laid off the government pays roughly half of the workers’ wages.

Under work sharing, if firms cut back a worker’s hours by 20 percent, the government makes up roughly half of the lost wages (10 percent of the total wage in this case). That leaves the worker putting in 20 percent fewer hours and getting 10 percent less pay. This is likely a much better alternative to being unemployed.

In addition to its formal short-work program, Germany also has a system of hour banks where workers put in extra hours during good times. During a downturn they can draw on these hours to maintain their pay even if they are putting in fewer hours. There are also many agreements between unions and management to reduce work hours to address a drop in demand. These can be more easily negotiated in a country like Germany, where the unionization rate is more than twice that of the United States.

This institutional structure makes it much easier for Germany to deal with a reduction in labor demand by cutting work hours rather than laying people off. Of course even before the downturn Germany had a much shorter average work year than in the United States. Under the law workers are guaranteed more than four weeks of paid vacation every year in addition to 10 statutory holidays, paid family leave, and paid sick days … //

(full text).

(… My comment: maybe, but still neoliberal solutions, Heidi).

Links:

Centre for Economic Policy Research.org CERP /its website; on en.wikipedia;

The three mandates of the European Central Bank: the price level, employment and stability, on RWER Blog, by merijknibbe, March 31, 2013.

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