Behind the German job miracle fRDB Workshop Beyond Dual Labour - - PowerPoint PPT Presentation

Behind the German job miracle

fRDB Workshop “Beyond Dual Labour Markets. Time for Legislation.” Milan, March 17, 2010

Herbert Brücker University of Bamberg and IAB

2

Is there a German “job miracle” (Krugman)?

GDP declined by 5% in 2009, but unemployment rate

increased only by 0.2%-points in Germany

An explanation of this “job miracle” requires

understanding the links between the adverse demand shock and internal labour market flexibility in Germany

There are some lessons to learn for labour market

policies supportung internal flexibility, but the specific circumstances of the German “job miracle” have to be kept in mind

3

This presentation

Analyses the adjustment of Germany’s labour

market to the crisis

Discusses the economic and institutional causes of

labour hoarding in German firms

Describes and anlyses the mechanisms of a

policy instrument which supports labour hoarding: short-time work benefits

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Characteristics of the German shock

Adverse export demand shock (q2-2008 to q2-2009)

Exports declined by almost 40% Manufacturing value added declined by 19.3% total GDP declined by 5.9%

German financial sector heavily affected

Bankruptcies and systemic failure avoided by state aid

and guarantees

Some indications for credit shortages

But no real estate bubble

Real estate prices have been constant from 1999 to 2009

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Change of unemployment rate in %-points

• vs. GDP growth

in %, q2 2008 -- q2 2009

AUS A B CDN CZ DK FIN F D GR H IS IRL I J KOR LUX MEX NL NZ N PL P SK E S CH TR UK USA OECD

2 4 6 8 Delta Unemployment Rate

• 10
• 5

Real GDP Growth

Source: IAB/Möller (2010), based on OECD data.

6

• 5

5 10 15 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Jahr WR BIP real Trend

Germany: Real GDP growth rate and trend growth rate, 1950-2009

1966/67 OPEC I + II unification 9/11 recession Source: IAB/Möller (2010), Statistisches Bundesamt.

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Cyclical component of real GDP growth and employment growth, 1975- 2010

• 6
• 4
• 2

2 4 1975 1980 1985 1990 1995 2000 2005 2010 Jahr WR Beschäftigung WR BIP real

Zyklische Komponenten

Source: IAB/Möller (2010), Statistisches Bundesamt, Bundesagentur für Arbeit.

employment growth real GDP growth

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The unexpected employment stability

Forecasting the adjustment of employment

Source: Möller (2010).

9

• 6
• 5
• 4
• 3
• 2
• 1

1 2 3 2007 2008 2009 actual 1-step ahead forecast

The unexpected employment stability (cont.)

Forecasted and actual growth of employment (cyclical component), 2007-2009

Source:Möller (2010) 95% confidence interval

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Which sectors are affected?

growth rate of value added in % manufacturing total economy upswing q1/2004-q1/2009 9.4 18.4 recession q2/2008-q2/2009

• 5.9
• 19.3

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Share of firms affected by labour shortages (2008) and share of firms adversely affected by crisis (2009)

Source: IAB survey of firm vacancies and Möller (2010).

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Which regions are affected?

Level of unemployment rate vs. change of unemployment rate in % (12/2009)

Source: Bundesagentur für Arbeit and Möller (2010).

unter -5,0

• 5,0 bis unter 5,0

5,0 bis unter 15,0 15,0 bis unter 25,0 25,0 und höher Vorjahresveränderung in %: unter 3,0 3,0 bis unter 6,0 6,0 bis unter 9,0 9,0 bis unter 12,0 12,0 und höher Arbeitslosenquote in %:

unemployment rate in % (DE: 7.9 %) change of unemployment rate in % (DE: 5.6 %)

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Which groups are affected?

Annual change of unemployment rate in % (Dec. 2009)

15.9

• 0.5

11.5

• 1.2

7.6 14.1 7.6 8.1 7.7

• 4
• 2

2 4 6 8 10 12 14 16 18

m e n w

• m

e n 1 5

• 2

5 a g e g r

• u

p

• f

t h e s e : b e l

• w

2 5

• 6

5 a g e g r

• u

p a f t h e s e : a b

• v

e 5 5 n a t i v e s f

• r

e i g n e r a l l

increase (decrease) of unemployment rate in %

Source: Bundesagentur für Arbeit.

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Understanding the job miracle I: sectoral aspects

The crisis hit basically German export industries

which have specific characteristics

high share of Melitz (2003) type firms with high

productivity and profitability (Fryges/Wagner, 2008)

• perate under imperfect competition

benefited from moderate wage increases relative

to Eurozone and other competitors in last upswing

faced labour shortages in last upswing have accumulated substantial financial reserves have capabilities to deal with high demand volatility

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Understanding the job miracle I (cont.)

Consequently, the crisis affected regions and

workers which have not been affected by the stagnation in 2002-2005

Service demand has been stable or increasing,

while construction was only proportionally affected

Employment growth in some regions with high

unemployment levels

While dual labour markets are a general feature

• f the German economy, the crisis has not (much)

contributed to increase it

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Internal flexibility and labour hoarding

Decomposing the German output shock shows

that firms hoard labour

High level of internal flexibility through working time

adjustment

reduction of stocks of overtime working hours working time accounts short term work

But also substantial reduction in labour productivity

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Decomposing real GDP

In levels:

GDP = labour force x annual working time x hourly labour productivity

In changes:

GDP growth rate = growth rate of labour force + growth rate of working time + growth rate of labour productivity

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A decomposition of the 2008-09 GDP decline

labour force employees covered by social security system real GDP

• 2,693
• 1,840

actual employment

• 240
• 164

labour hoarding 2,450 1,676

• f this: unexpected

1,450 990 decomposing labour hoarding working time effect 1,391 short time work 360

• verworking hours

285 working time accounts 244 hourly labour productivity 1,063

Source: IAB/Möller (2010)

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Overtime work and working hours accounts

Reducation of stocks of overtime working hours

and working time accounts contributed substantially to internal flexibility

Reduction of overtime working hours:

285,000 full-time equivalents

Working time accounts:

244,000 full-time equivalents

Share of German firms with working time accounts

have increased from 29% (1999) to 41% (2009), particularly in manufacturing

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Impact of working time account saldo on labour volume, Q2 1991 – Q4 2009

• 4
• 3
• 2
• 1

1 Arbeitskonteneffekt 1991q3 1993q3 1995q3 1997q3 1999q3 2001q3 2003q3 2005q3 2007q3 2009q3 Zeit

Source: Working time calculation of IAB; Möller 2010.

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Short-time work benefits

Explain quantitavely only a moderate part

• f labour hoarding

360,000 full-time equivalents relative to 2.4 million jobs

which are hoarded in 2009 (annual average)

May however have a larger impact since they

subsidise the salaries of much more workers

1.5 millions noticed by Dec. 2009 average working-time reduction of 32-40 per cent average duration of 6 month

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400000 800000 1200000 1600000 2000000 2400000 92 94 96 98 00 02 04 06 08 KUG AKUG

Short-time workers, Q1-1991 to Q3-2009

Short-time workers Transfer short-time workers

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Full-time equivalent of short-time workers, 1/2008 to 9/2009

100,000 200,000 300,000 400,000 500,000 600,000

J a n 9 8 J u l 9 8 J a n 9 9 J u l 9 9 J a n J u l J a n 1 J u l 1 J a n 2 J u l 2 J a n 3 J u l 3 J a n 4 J u l 4 J a n 5 J u l 5 J a n 6 J u l 6 J a n 7 J u l 7 J a n 8 J u l 8 J a n 9 J u l 9

full-time equivalent of short-time workers (persons

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Full-time equivalent of short-time workers by sector, 9/2009

sector in persons in % of all agriculture, mining, energy, water supply 2,750 0.8 manufacturing industries 241,632 71.9 machinery 86,743 25.8 metall 63,665 18.9 automobile 33,297 9.9 construction 12,546 3.7 transport, gross and retail trade 30,937 9.2 services 48,399 14.4 temporary agency work 9,589 2.9 all 336,255 100.0

Source: Federal Employment Services, 2010.

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Regional breakdown of short-time workers, 2009

(Labour market districts)

Rate of short.-time workers in %

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How do short-time work benefits work ? (I/IV)

The legal framework

Three different types of short-time work benefits Business-cycle short-time work benefits (§ 170 SGB III) Seasonally short-time work benefits (§ 175 SGB III)

E.g. construction workers in winter times

Transfer short-time work benefits (§ 216b SGB III)

Restructuring of firms and enterprises (e.g. plant closures)

Payment via social security contributions by

Federal Employment Services (BA)

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How do short-time work benefits work? (II/IV)

Firms notice short-time work benefits at Federal

Employment Services

Must prove that economic conditions require a

temporary reduction of working hours of more than 10% for 1/3rd of employees (since 2009: 1/10th of employees)

Employee must have a standard contract and pays

social security contributions

Employee must participate in labour market and is

subject to job placements

Enforcement problems

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How do short-time work benefits work? (III/IV)

Replacement rate of 60% (singles) and 67%

(1 child or more) analogously to unemployment benefits

Maximal duration of short-time work benefits is

regulated by governmental directive

rule: 6 month (never practised), maximum: 24 month 18 month (1/2009), 24 month (6/2009), 18 month (1/2010)

Firms can apply breaks to prolong duration period

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How do short-time work benefits work? (IV/IV)

Retention costs of firms

Social security contributions: calculation based

• n 80% of difference between full-employed gross

earnings and actual gross earnings

Since 2009, 50% of these are also paid by Federal

Employment Services during first six month, then completely

If short-time workers participate in approved qualification

measures, the Federal Employment Services pays social security contributions

Many other fixed costs of employment

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Labour costs with and without qualification measures

without qualification with qualification reduction of working hours in % Source: Crimman/Wiesner (2009)

total costs

31

Labour costs with and without qualification measures

without qualification with qualification reduction of working hours in % Source: Crimman/Wiesner (2009)

costs per working hour

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What incentives creates this system?

Sharing a (small) part of the costs of short-time work

benefits and fixed employment costs create firm incentives to use the instrument only temporarily and when a recovery is expected

Reducing the firm contribution in the course of the

crisis has extended the utilisation of the instrument and may result in higher employment reductions later

The instrument is expensive but affects structural

adjustment less than many observers expect

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Understanding the German job miracle II

Thus, firms respond to demand shock by using

internal flexibility mechanisms

Adjust working time by

reducing the stock of overtime working hours working time accounts short-time work arrangements

Still, reduction in hourly labour productivity

indicates that firms hoard labour beyond that by a substantial amount

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Why do firms hoard labour?

Option value of waiting theories

e.g. Bentolila/Bertola (1990)

Explains hiring and firing decisions by irreversible

investment in human resources under uncertainty

Option value of waiting generates zone of inactivity Threshold level of firing increases with size of

irreversible investment, firing costs and uncertainty

Links between firm and sector characteristics and

institutions may explain why high option value of waiting is particularly high in Germany

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Institutions and internal flexibility

System of vocational training increases incentives

to invest in firm-specific human capital

Employment protection creates still high firing costs

Social plans forces firms to fire productive workers first

Short-time work benefits compensate firms partially

for labour hoarding

Increasing firm-level wage setting and industry-

level collective wage agreements which allow firms to opt out facilitate internal adjustment