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Thursday, May 19, 2011

Labor Market Policy in the Great Recession

John Schmitt of the CEPR has a new paper on what the US can learn about stabilizing employment from the recent experience of Denmark and Germany. Here's the executive summary:

Labor Market Policy in the Great Recession: This paper reviews labor-market performance of Denmark and Germany during the Great Recession. From the mid-1990s through the onset of the Great Recession, Denmark had what were arguably the most successful labor-market outcomes in the OECD, but the country has suffered in recent years. Germany, on the other hand, struggled with high unemployment, slow job growth, and rising wage inequality through much of the period between unification and the onset of the Great Recession, but has outperformed the rest of the OECD since. Labor-market institutions may explain the different experiences of the two economies. Danish institutions – built around numerically flexible employment levels and strong income security for workers – appear to perform well when the economy is at or near full employment. In good times, the country’s expensive active labor market policies work to connect unemployed workers to available jobs. In a severe downturn, however, where the overwhelming cause of unemployment is a lack of aggregate demand, institutions that encourage adjustment through employment are a liability and policies that seek to “activate” workers are not particularly effective. German labor-market institutions, which emphasize job security by keeping workers connected to their current employers, may have drawbacks when the economy is operating near full employment because they may discourage the efficient reallocation of workers from firms and industries where demand is falling to firms and industries where demand is on the rise. These same institutions, however, appear to have been well-suited for coping with the Great Recession because they encouraged firms to cut hours rather than workers, sharing the burden of the downturn more widely and helping firms keep their workforce in place and ready for the subsequent upturn.

He adds:

The positive lesson for the US is that we have a lot of scope to give employers incentives to cut hours rather than jobs, including improving and expanding "work-sharing" (part-time unemployment benefit) programs as well as implementing new direct tax credits to firms that expand paid time off (paid sick days, paid family leave, paid vacations, and other measures).

The negative lesson is that focusing on supply-side issues such as training, education, and improved job-matching for the unemployed --as much sense as they make in the long run-- is not likely to get us very far when the economy is at 9 percent unemployment. Denmark does far more than we could ever hope to accomplish along these lines and the unemployment there almost doubled between 2007 and 2010.

    Posted by on Thursday, May 19, 2011 at 01:17 PM in Economics, Unemployment | Permalink  Comments (16)


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