Saturday, May 21, 2011

Not A Good Explanation For Strong German Labor Market

Floyd Norris tries to explain the strong German labor market this way:

The relatively small rise in joblessness in Germany may have been partly because of government programs that encouraged companies to keep workers on reduced hours rather than let them go. The rapid recovery reflects the strength of the German export sector, which was enhanced by the fact that many European countries lost competitiveness because of rising labor costs.

The key problem here is that both of these factors were reverted or represented reversals. The decline in hours per workers have been almost entirely reversed, so if that limited the drop in employment during the crisis it should have also limited the gains in employment now as employers can meet increased demand without hiring new workers. Similarly, while German exports are increasing fast now, they dropped fast during the recession.

For the period as a whole, neither the change in hours worked per worker nor exports differ significantly between Germany and other countries, so these factors likely played at best only a very small role. A more important explanation for the strong German labor market is the one I discussed here.