Many economists argue that German labor market reforms implemented in the 2000s clearly paid off during the global recession, particularly the combination of less-generous unemployment benefits, wage moderation, and incentives to hoard labor. A long-established work program called Kurzarbeit (literally “short work”) is credited with helping to smooth Germany’s labor market adjustment much better than in previous recessions by allowing firms to reduce employee hours.
The graphs provide some evidence of the effect of this program at the aggregate level. Average annual hours per worker between 2008 and 2009 dropped by 1.87 percent in the United States, but fell more markedly—by 2.74 percent—in Germany. Massive layoffs occurred in the United States, but employment losses were barely noticeable in Germany. In addition, between the recession’s peak and trough, the U.S. employment-to-population ratio decreased by 2.6 percentage points (from 48.4 to 45.8 percent) while it increased by 0.6 percentage points in Germany (from 48.7 to 49.3 percent).
If this labor market feature works well in Germany, could it be adopted in other countries as well? One version of a short-time work program—called work sharing—already exists in the United States, with the goal of limiting job losses during difficult economic times. At the start of this year, twenty-six states and the District of Columbia were able to offer the program (now under the umbrella of the Layoff Prevention Act of 2011), though the levels of implementation vary.
How this graph was created: The graph of unemployment rates is a simple plot of the unemployment rates for the two countries since 2008. The graph of hours worked is plotted using the option “Index (scale value to 100 for the chosen period).” The data samples were shortened to highlight the previous recession cycle.
Suggested by Silvio Contessi and Li Li.
View on FRED, series used in this post: