German Employment—Posner

I am distrustful of international economic comparisons, especially when only two countries are compared, in this instance the United States and Germany. Countries differ in a large number of respects that bear on economic performance; in a large sample, many of those differences may cancel, but a sample of two is tiny.

 

Becker provides a plausible explanation of Germany’s lower unemployment rate, but is it correct? According to the Bureau of Labor Statistics, Germany’s unemployment rate is not the lowest current unemployment rate of ten major countries that the BLS has compared after adjusting the unemployment rates in those countries to correspond to U.S. concepts of unemployment. France has the highest unemployment rate—9.6 percent—followed by the United States at 9.5 percent. The German rate is 7.5 percent. Australia, Canada, Japan, and the Netherlands have substantially lower unemployment rates. The U.K. unemployment rate, surprisingly, is only slightly above the German rate. Sweden and Italy complete the picture, with unemployment rates roughly halfway between the German and the American. Given European labor laws, it is surprising that the unemployment rate in France is only trivially higher than the U.S. rate and that the unemployment rates in Italy, the Netherlands, and Sweden are significantly below the U.S. rate, though Swedish labor laws, at least, are fairly loose, and the Italian unemployment rate is believed to be underestimated. But why should Canada and Japan have unemployment rates substantially below the U.S. level?

 

I venture the following guess. All these countries except Australia had before the economic crisis a higher personal savings rate than the United States. And all without exception derived a much higher fraction of their national income from exports than the United States. Because of our very low personal savings rate, and the (related) fact that most savings were in the form of home equity and (directly or indirectly) common stock, the crash of 2008 ushered in a protracted period of stagnant consumption spending as frightened American consumers increased their personal savings rate from 1.7 percent three years ago to 6.4 percent today. Producers and distributors in the third quarter of 2008 and in 2009 could foresee a sustained period of subpar demand, and so laid off many workers and have been slow to rehire them, anticipating that demand for goods and services will not increase substantially for some time.

 

In other advanced economies, higher personal savings and greater reliance on export earnings created expectations of more rapid economic recovery. Consumers would have less incentive to increase their savings further and thus reduce consumption; so businessmen could expect demand to revive sooner than in the United States. They could also expect their export markets to rebound soon, knowing that major importers of technologically advanced manufactured goods, such as China, India, and Brazil and other Latin American countries, had been hit less hard by the economic crisis. The quicker a solid economic recovery is expected to occur, the less prone employers are to lay off workers, because laying off and rehiring are costly, and the costs may well exceed a short period in which employees are not busy because demand for the employer’s product is weak.

 

I agree with Becker that the Obama Administration’s overly ambitious legislative program and intermittent outbursts of hostility to business are hurting our economic recovery. But I would be inclined to give greater weight, in explaining our stubbornly high unemployment, to the other factors that I have mentioned.

Comments

[D.J.Vandenberg]

Perhaps the more general equations of prosperity boil down to:

US: Mediocre people + Cowboy individualism = Most prosperous nation in the world.

Europe: Most competent people + Collectivism and Welfare State (dis)incentives = Mediocre prosperity.

New America (the America of "Hope" and "Change"): Mediocre people + Collectivism and Welfare State (dis)incentives = (Any guesses?)

The “change”: Increased dis-incentives to higher production.
The “hope”: Production (and thus prosperity) will not be affected.

[Vivian Darkbloom]

Becker is almost certainly right that the interests of unions and their members retard somewhat required economic adjustments. But, the prevalence of strong unions and the effect on unemployment during recessions cuts both ways. If it is more difficult to release employees who are members of strong unions, or due to the presence of more employee friendly labor laws generally, then this should have the short-term effect of keeping unemployment artificially low in a recession and temporarily keeping up spending demand. If Becker's thesis about unions is correct, the effect of strong unions would likely be shown, at least initially, in a delayed entry into recession and a slower recovery of corporate profits coming out of one rather than lower unemployment. I suspect that this is the case in the current recession: the corporate profits of American corporations likely decline and recover more quickly than those of countries with stronger unions and labor laws. I think the negative effects of unionism and stringent labor laws are more structural and that the negative effects of lower growth and employment would need to be observed over a much greater period of time than merely during a recession.

Posner is right that comparing unemployment rates among countries is about as accurate as wetting one's finger to see which way the wind blows. Among other things, unemployment statistics are kept artificially low in many European countries due to the relatively large numbers of persons who enjoy disability and similar benefits that keep them out of the official unemployment statistics. And, I think the relatively lower German unemployment rate can be partly explained by the effects mentioned in my previous paragraph. Posner is likely also correct about the effects on unemployment when a country is a strong exporter and and its populace has relatively higher savings. I was about to write that I am not convinced that the personal savings rate has much, if anything to do with the issue. Saving is the product of a particular mind set and savers are savers even, and perhaps particularly in recessions. I suspect that in a recession the German savers are saving most of their savings and spending their unemployment benefits. I doubt very much there is any net increase in demand from their savings. But, one has to consider the following, and I think that was Posner's point: it is not necessarily the fact that Germans are spending savings during a recession that differentiates them from Americans. It is the fact that Americans are not only not savers but are deeply in debt and are required to pay down debt during a recession. This results in a dramatic swing in spending habits. This boom/bust spending pattern is like running from one end of the ship to the other. Compared to this, Germans hold a relatively steady course.

[Jim]

In a global economy, labor costs (standard of living) seek their own level over time. The US labor costs have a way to go to allow for equilibrium and psychologically Americans are not yet accepting of and/or understand the lower standard of living required to be competitive. The present gang in Washington wants everyone to be on the same level but do not want to say so.So _ _ _ _ _.

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[Peter]

Whenever discussing German unemployment rates, one should also take into account different measuring methodologies. Using the OECD measure, which is more similar to the U.S. method, German unemployment is at approx. 7.0 percent. (http://www.cepr.net/index.php/blogs/beat-the-press/the-german-unemployment-story-is-better-than-the-nyt-suggests)

It is also worth noting that 20 years after reunification, Germany is still dealing with the 'special' situation of east Germany, where unemployment remains higher than in the West.

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Jim Says:"In a global economy, labor costs (standard of living) seek their own level over time. The US labor costs have a way to go to allow for equilibrium and psychologically Americans are not yet accepting of and/or understand the lower standard of living required to be competitive. The present gang in Washington wants everyone to be on the same level but do not want to say so.So _ _ _ _ _."

Will the quisling CEOs, traders, I-Bankers & others who hold jobs with authority in the economy accept lower wages & longer working hours too, or is that just for the plebians at the bottom of the food chain?

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Will the quisling CEOs, traders, I-Bankers & others who hold jobs with authority in the economy accept lower wages & longer working hours too, or is that just for the plebians at the bottom of the food chain?

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Unemployment affects the economy of every country it maybe big or small.Rising unemployment decreases the economy.

[Positroll]

The best explanation I read so far re: the labor market developments in Germany in 2009 and early 2010 is a piece by Moeller, "The German labor market response in the world recession", ZAF (2010) 42:325–336,
http://www.springerlink.com/content/60x1512tpr61m03p/fulltext.pdf

Abstract: This paper aims at analyzing the astonishingly
mild response of the German labor market to the severe
demand shock that occurred in the aftermath of the financial
crisis. It stresses the role of institutions such as workingtime
accounts which create a large scope for a buffering
capacity within the firm. It is argued that labor market reforms
and the behavior of social partners have strengthened
the adjustment possibilities when facing a temporary slump.
The crisis mainly affected export-oriented manufacturing
firms in Germany’s thriving regions. Before the crisis
those firms were the engines of growth and suffered from
a shortage of qualified professional workers. Moreover,
training costs are relatively high and dismissals would entail
a significant loss in firm-specific human capital. Supported
by the generous short-time work schemes, these factors
contributed to the high willingness of crisis-stricken firms
to pursue a strategy of massive labor hoarding. By contrast,
the comparatively high employment protection does not
seem to play a major role in explaining the adjustment
behavior of German firms in the current crisis."

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[Marco]

To complete the picture, though, I would also look at participation in workforce, in addition to unemployment,
For instance, unemployment in Italy hasn't gone up much, but if you look at the % of employed people, it is only 56.9% (-0,7% july 2010 compared to july 2009) and 37,8% of the population is inactive.
I think you can make a full picture/comparison only if you consider % of employed and % of active in addition to unemployment, otherwise some relevant information is omitted.

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[M Hoffman]

Blog, blah b.s. These blogs are the regurgitation of "facts" obtained over the internet and not any original analysis. Germans are intelligent and disciplined. Why compare "unemployment rates"? Why not compare relative standards of living and the equitable distribution of wealth? Why is it so critical that so many must "work" so much? Do the wealthy really engage in such "work"? Why not? Maybe we should consider that a society is superior in which its citizens lead meaningful and comfortable lives without being continuously in the yoke. In Germany, as well as most other western nations, the quality of life has a greater parity. In America, as a result of the economic Darwinism tolerated in conjunction with the corruption of the banking and political systems, the "poor will always be with us." Meanwhile, we have the "academics" pretending they know something. Opinions, analysis, b.s., relying on skewed incompatible government statistics.

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