Greg Ip

Articles by The Economist’s U.S. Economics Editor

Economics Focus: Hoard instinct

leave a comment »

The nature of the recession, not government schemes, may explain why some countries lost so few jobs

Jul 8th 2010

 [Greg Ip] GERMANY’S gross domestic product fell by 4% in the two years to the end of 2009, twice as much as in America. Yet its employment rose by 0.7% while America’s plunged by 5.5% (see left-hand chart). When German politicians contemplate why a gruelling recession produced almost no increase in unemployment, they usually have a one-word answer: Kurzarbeit. “It is only thanks to Kurzarbeit that more jobs were not lost,” Angela Merkel, the chancellor, told Germany’s parliament in November.

Kurzarbeit is Germany’s practice of providing a federal subsidy to companies that voluntarily reduce the hours of their employees while keeping them on the payroll. It is perhaps the best known of many short-time work programmes implemented or expanded during the recession by countries trying to defray the social and economic costs of unemployment. But such schemes only partly explain why employment in many countries, Germany included, diverged so greatly from output. Other reasons can be found in the OECD’s annual “Employment Outlook”, published on July 7th. (But only after a lot of digging: the 308-page report is a dense mass of impenetrable jargon, a frustrating way to treat a subject so vital to the average citizen.)

Judging the net impact of short-time work schemes on permanent employment is not simply a matter of counting all programme participants. Some people would have stayed in employment anyway and so the subsidy is wasted on them. Others are sacked while the programme is still running or when it ends—their job is not truly saved. To glean its net impact the OECD compares employment across countries with the extent to which short-time working was used. It concludes the average scheme boosted permanent employment by 0.4% relative to what it would have otherwise been. The size of the boost varied considerably, from 1.3% in Belgium to zero in Norway (see right-hand chart). It estimates that the net impact for Germany, at 220,000, is considerably less than the 350,000 jobs officially preserved byKurzarbeit, suggesting that a third of the subsidy was wasted.

That is still nothing to be sniffed at. The net benefit translates to a 0.75% boost to permanent employment in Germany, enough to cover the entire increase in the country’s employment between the fourth quarter of 2007 and the end of 2009. Yet this effect is not big enough to explain the enormous divergence between its steady unemployment rate and its falling GDP. In Germany and elsewhere many companies cut hours or held onto idle workers (as evidenced by falling productivity) without any prod from government. A study by the Federal Employment Agency in Germany concluded that Kurzarbeit explains only a quarter of the reduction in the average work week. The remainder came from employers reducing overtime or workers’ hours under contract provisions with unions; or by workers taking free time stored up in working-time accounts before the downturn.

The path of economic recovery may partly depend on whether employment stayed firm because of companies’ own decisions rather than government subsidies. Short-time work schemes introduce distortions: they could impede growth and productivity once recovery begins by discouraging workers from moving from firms in declining industries to growing ones. Firms that hoard workers voluntarily do so because they expect to need them when business bounces back and, having invested heavily in their training, do not want the expense of replacing them. That suggests a more upbeat view of the future.

In fact, employment is unlikely to spring back sharply anywhere in the OECD but for very different reasons. In countries where a collapse in housing and construction was a big contributor to the recession, notably Spain, America and Ireland, firms were much more likely to slash employment and raise the productivity of remaining workers, believing the recession signalled a structural decline in the importance of construction. Long-term unemployment has risen as a share of total employment, reflecting both the length of their recessions and permanent job losses in industries like construction. Both factors will make it difficult rapidly to re-employ the jobless.

Kinder cuts

In countries whose recessions were due largely to falling exports, such as Japan, Mexico, Germany and Korea, the OECD notes that companies were more likely to cut hours and productivity than jobs. The export drop “might plausibly have been viewed as being a largely transitory phenomenon”, reflecting global conditions rather than a structural change in the economy. Such firms are also more likely to use highly skilled labour, and the report reckons that these companies are far less prone to cut employment when sales fall. That also means that Japan, Germany and other countries where firms hoarded labour are at greater risk of a jobless recovery: higher production will be achieved by restoring hours and productivity rather than payrolls. But that is not a bad thing if it is because employment fell so little in the first place.

Short-term work programmes have played their part in softening the effects of recession. Although they may yet slow the movement of employees from declining companies to more productive employers, most governments in Europe have wisely resisted the remedies of previous recessions, such as early retirement or easier qualification for disability benefits, that hurt their long-term labour-force growth. But the independent decisions of firms to hoard labour also help explain unemployment during the crisis and beyond. Just because bosses expect business to rebound does not mean they are right, of course. If the global economy, and thus exports, prove weaker than businesses hoped, they may start to fire the workers they had previously hoarded, irrespective of the government incentives on offer.

 The original article is linked here.


Written by gregip

July 8, 2010 at 2:50 pm

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: