As the United States struggles to replace the 8 million jobs lost in the Great Recession, it makes sense to look at the one developed nation that came out of the global downturn with lower unemployment than it had going in: Germany.
You'd expect Germany's jobs problem to have been more severe than America's. After all, the recession's impact on the German economy was greater than it was in the United States. German GDP declined by 3.8 percent, compared to 2.6 percent over here. And in response, Germany's government provided much weaker fiscal and monetary stimulus than America's did.
And yet, according to numbers compiled by the Organization for Economic Cooperation and Development, Germany's jobless rate in 2009 was 7.5 percent--1.2 percentage points lower than it had been two years earlier, before the recession hit. During that same period, the U.S. unemployment rate increased by a whopping 4.7 percentage points. And in the last two years, Germany's jobs situation has largely continued to improve, while ours has stayed relatively flat.
So what explains Germany's success? A new study by the liberal Center for Economic and Policy Research (CEPR) concludes that the German jobs economy has benefited greatly from the country's labor market institutions, which stress job security by keeping workers connected to their current employers. In short, CEPR senior economist John Schmitt finds, German employers adjusted to the downturn by reducing workers' hours, instead of laying them off.
It's not that German employers are naturally more generous than employers anywhere else in the world. Rather, they took advantage of several initiatives that provided German bosses incentives to keep workers on at reduced hours. One such program, known as short-time work, provides part-time jobless benefits to workers who have had their hours reduced thanks to a dip in demand. Collective bargaining agreements also led employers to initiate reductions in working time--a process that no doubt benefited from the greater representation that organized labor enjoys on corporate boards in Germany than it does in the United States. Finally, most German companies use "working-time accounts," which let workers "bank" hours during times of high demand by working more than usual. Then, when things slow down and employers need to cut hours, they pay workers for the hours they accumulated previously.
In other words, the mechanics may vary, but the principle is the same: finding ways to make it easier for businesses to keep workers on while reducing their hours when a downturn hits, instead of just cutting them loose.
To be sure, Germany's system may not always make sense. During boom times, it can be inefficient, because it discourages workers from leaving industries or companies where demand is falling, and moving to industries or companies where it's rising. But it's clear that the German approach is far better at limiting joblessness during a downturn--and the United States is now experiencing the heavy costs of going through a sustained economic slump without such safeguards.
That's the lesson from the German experience that the report draws for the United States. The study notes that "US labor-market institutions did little to encourage firms to reduce average hours rather than employment levels." In part, the decision to reduce jobs over hours stemmed from the way that U.S. companies provide benefits--health insurance in particular. Under this system, it was more cost effective for employers to save money by laying workers off, rather than reducing their hours.
Another lesson is that education and training may not be the answer. Some analysts have argued that our unemployment problem is driven largely by "structural" factors -- that is, a mismatch between the types of job openings that exist in a given area, and the skills that workers in that area have. The answer, they contend, is re-training programs.
But the report contrasts Germany's experience with that of Denmark, which spends more than 12 times what the United States does to train and activate workers, with not much better results. Denmark's jobs situation is almost the reverse of Germany's. Before the recession, unemployment was at just 4.0 percent and growth was strong. But by 2009, joblessness had jumped by 2 percentage points. That suggests, says the report, that when the problem is a lack of demand, retraining can't do much to help.
"To the extent that US policy makers have decided on any course of action, it appears to be, in President Obama's words, to 'win the future' by investing in education and training," the report concludes. But that only works, it adds, "when there are jobs to be had. For the immediate future, the experience of Germany looks to offer a better way forward."
(The production hall of HAWE Hydraulik SE photographed in Freising, southern Germany, November, 2010: AP Photo/Sebastian Widmann, File)