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Contrasting the U.S. and German unemployment rates

FRED’s rich set of international indicators allows us to compare the behavior of different countries over time. Here we contrast the behavior of unemployment in the U.S. and Germany. We use the OECD’s harmonized data series for both countries so that the population definitions are the same: Working age population = Active population + Inactive population. Active population = Employed population + Unemployed population. The harmonized unemployment rate is defined as the ratio of unemployed population to active population, and the resulting series are plotted in the graph. (The shaded recession bars for the U.S. are from the NBER and for Germany are from the OECD.) The data go back to 1991, but this graph starts in 2003, the period after the so-called HARTZ labor market reforms in Germany.

The graph highlights huge differences in the behavior of the two unemployment rates. In 2003 and 2004, Germany, but not the U.S., was in a recession. Its unemployment rate was much higher than—and for a while, double—the U.S. unemployment rate. But since the implementation of HARTZ IV, the German unemployment rate has been falling. HARTZ IV significantly reorganized and reduced the unemployment insurance program and narrowed the eligibility criteria. More interestingly, although both the U.S. and Germany entered recession around the same time in late 2007/early 2008, the two unemployment rates behaved quite differently: The U.S. rate skyrocketed and remained persistently high; the German rate kept declining for a while, had a relatively modest increase, then had a similar decline as before. By the end of the sample, the two countries had switched places: The U.S. looked like Germany and Germany looked like the U.S. in the early 2000s.

How this graph was created: As noted above, we want comparable unemployment series. We use the OECD harmonized series for the U.S.: USAURHARMMDSMEI. Add this series to a graph. Next, add the comparable German series by using the “Add Data Series” menu below the graph to search for and select DEUURHARMMDSMEI. Finally, add the indicator for Germany’s recessions: DEUREC. To make the graph more readable, use the right axis for this third series. Also, don’t forget to start the graph in 2003.

Suggested by Alexander Monge-Naranjo and Faisal Sohail

View on FRED, series used in this post: DEUREC, DEUURHARMMDSMEI, USAURHARMMDSMEI

The Phillips curve after the Great Recession

During the 1960s, some economists made the case that the Phillips curve—a negative relationship between the inflation rate and the unemployment rate—represented a tradeoff for policymakers. So, according to this view, a central bank could achieve permanently lower unemployment by accepting higher inflation. However, beginning with Milton Friedman in 1968, other economists made the case that the Phillips curve tradeoff was not permanent. According to this alternative view, the Phillips curve correlation might be observed in the data over some periods of time, depending on the types of shocks hitting the economy, but a central bank could not exploit a Phillips curve tradeoff to create permanently low unemployment. Then, beginning in the 1990s, New Keynesian economists propelled a resurgence of interest in the Phillips curve, which plays a prominent role in New Keynesian theory.

The graph shows the Phillips curve we observe in the data following the end of the Great Recession. The data run from June 2009 to August 2015, and the line connects the points in the scatter plot in temporal sequence running roughly from right to left in the graph. Over this period, the Phillips curve slopes the wrong way—a higher unemployment rate is associated with a higher inflation rate. Even if people may be waiting for a lower unemployment rate to produce higher inflation, this may never happen.

How this graph was created: Search the categories in FRED: Under the “Prices” heading, select “consumer price indexes” then “personal consumption expenditures: chain-type price index, monthly.” Set the sample as 2009-06-01 to 2015-08-01. Under the “Edit Data Series” option, change “Units” to “Percent Change from Year Ago.” This will yield a graph of the Fed’s chosen measure of the inflation rate over the post-recession period. Next, choose “Add Data Series” and search for and select “civilian unemployment rate, monthly, seasonally adjusted.” Now, edit this series by selecting the “Edit Data Series 2” option and setting the y-axis position to the left; select the “Graph Settings” option and set graph type to “Scatter.” Then choose “Edit Data Series 2” and set units to “Percent.” Finally, choose “Edit Data Series 1” and set line width to “1.”

Suggested by Steve Williamson.

View on FRED, series used in this post: PCEPI, UNRATE


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