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.

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