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SEB report: German labour market efficient after recent reforms

SEB report: German labour market efficient after recent reforms

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Published by SEB Group
An examination of the empirical relationship between GDP growth and the unemployment rate suggests that labour market reforms such have paid off for Germany. Lower GDP growth actually in 2008/2009 did not trigger a higher unemployment rate. This stands in sharp contrast to the eurozone as a whole. Other data also suggest that the German labour market is functioning more efficiently nowadays, say SEB’s experts in a research note.
An examination of the empirical relationship between GDP growth and the unemployment rate suggests that labour market reforms such have paid off for Germany. Lower GDP growth actually in 2008/2009 did not trigger a higher unemployment rate. This stands in sharp contrast to the eurozone as a whole. Other data also suggest that the German labour market is functioning more efficiently nowadays, say SEB’s experts in a research note.

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Published by: SEB Group on Dec 05, 2012
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This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document
1
 are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted forany direct or consequential loss resulting from reliance on this document Changes may be made to opinions or information contained herein without notice.Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in theUS. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct ofinvestment business in the UK.
The German labour market is functioning moreeffectively
WEDNESDAY
DECEMBER 5, 2012
 An examination of the empirical relationshipbetween GDP growth and the unemployment ratesuggests that labour market reforms such asHartz I-IV and “Kurzarbeit” have paid off for Germany. During the Great Recession in 2008-2009, lower German GDP growth actually did not trigger a higher unemployment rate. This standsin sharp contrast to the euro zone as a whole and in particular to the Spanish labour market, whichwas hit hard during these years. Indeed, theinward shift in the German Beveridge curve alsosuggests that the German labour market isfunctioning more efficiently nowadays.
The German labour market continues to deliver upsidesurprises. According to Eurostat’s harmonised measure,the unemployment rate is now only 5.4 percent, muchlower than for the euro zone as a whole (11.7 percent).Much of the strength of the German labour market has todo with
past labour market reforms
such as the 2003-2005
Hartz I-IV reforms
, which raised work incentivesand improved job matching, and the government’srecent system of “
Kurzarbeit” allowances
, whichenable potentially redundant employees to work fewerhours with most of their normal pay.To illustrate and quantify the recent success of theGerman labour market, it is useful to study therelationship between GDP growth and theunemployment rate (i.e., the so-called
Okuncoefficient
). Table 1 shows how the unemployment rateresponds to one percentage point lower GDP growth(estimated relationship from 2000 through 2012 in thefirst column). According to our estimates, onepercentage point lower GDP growth in the euro zone as awhole push the unemployment rate 0.4 percentage pointhigher. In Germany, one percentage point lower growthmeans a 0.6 percentage point higher unemploymentrate, so during 2000-2012 the German labour marketdid not perform any better than the euro zone as awhole. Greece and Spain stand out with 3.2 and 1.1percentage points higher unemployment rates,respectively.However, when studying only the peak-to-trough ratioduring the 2008-2009 recession, Germany’s recentlabour market success is clearly evident; the GermanOkun coefficient is 0.0,
suggesting that lower GDPgrowth did not trigger a higher unemployment ratein Germany during these years
. As far as Spain isconcerned, 2008 and 2009 were really bad since theOkun coefficient was close to 2.Another way to illustrate the recent success of theGerman labour market is to study how the vacancy ratio(defined as the number of remaining job openingsdivided by the labour force) relates to the unemploymentrate (or the Beveridge curve in economist lingo).According to the chart below,
the German Beveridgecurve has shifted inward during the past couple ofyears, in sharp contrast to the situation in the UnitedStates, for example, which we illustratedhere
. Whatthis suggests is that the German labour market hasbenefited from past reforms and is now functioning moreefficiently. To illustrate, in October 2012 the vacancy ratein Germany was back at roughly the same level as in June2007, before the financial crisis, while unemploymentwas about 4 percentage points lower. Put differently, thechange in relationship has resulted in an inward shift inthe Beveridge curve, reflecting the fact that firms arenow hiring more workers per job opening than we would

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