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The German labour market is functioning more effectively

An examination of the empirical relationship between GDP growth and the unemployment rate suggests that labour market reforms such as Hartz I-IV and Kurzarbeit have paid off for Germany. During the Great Recession in 20082009, lower German GDP growth actually did not trigger a higher unemployment rate. This stands in sharp contrast to the euro zone as a whole and in particular to the Spanish labour market, which was hit hard during these years. Indeed, the inward shift in the German Beveridge curve also suggests that the German labour market is functioning more efficiently nowadays.
The German labour market continues to deliver upside surprises. According to Eurostats harmonised measure, the unemployment rate is now only 5.4 percent, much lower than for the euro zone as a whole (11.7 percent). Much of the strength of the German labour market has to do with past labour market reforms such as the 20032005 Hartz I-IV reforms, which raised work incentives and improved job matching, and the governments recent system of Kurzarbeit allowances, which enable potentially redundant employees to work fewer hours with most of their normal pay.

WEDNESDAY DECEMBER 5, 2012

To illustrate and quantify the recent success of the German labour market, it is useful to study the relationship between GDP growth and the unemployment rate (i.e., the so-called Okun coefficient). Table 1 shows how the unemployment rate responds to one percentage point lower GDP growth (estimated relationship from 2000 through 2012 in the first column). According to our estimates, one percentage point lower GDP growth in the euro zone as a whole push the unemployment rate 0.4 percentage point higher. In Germany, one percentage point lower growth means a 0.6 percentage point higher unemployment rate, so during 2000-2012 the German labour market did not perform any better than the euro zone as a whole. Greece and Spain stand out with 3.2 and 1.1 percentage points higher unemployment rates, respectively. However, when studying only the peak-to-trough ratio during the 2008-2009 recession, Germanys recent labour market success is clearly evident; the German Okun coefficient is 0.0, suggesting that lower GDP growth did not trigger a higher unemployment rate in Germany during these years. As far as Spain is concerned, 2008 and 2009 were really bad since the Okun coefficient was close to 2. Another way to illustrate the recent success of the German labour market is to study how the vacancy ratio (defined as the number of remaining job openings divided by the labour force) relates to the unemployment rate (or the Beveridge curve in economist lingo). According to the chart below, the German Beveridge curve has shifted inward during the past couple of years, in sharp contrast to the situation in the United States, for example, which we illustrated here. What this suggests is that the German labour market has benefited from past reforms and is now functioning more efficiently. To illustrate, in October 2012 the vacancy rate in Germany was back at roughly the same level as in June 2007, before the financial crisis, while unemployment was about 4 percentage points lower. Put differently, the change in relationship has resulted in an inward shift in the Beveridge curve, reflecting the fact that firms are now hiring more workers per job opening than we would
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Economic Insights

expect given the historical pattern. This can be interpreted as an increase in the efficiency with which employers and workers are matched in the labour market. This increase in efficiency is likely to be the result of 1) better skill matching between labour demand and supply and 2) less geographical friction in the sense that unemployed workers are now more willing to move to where the jobs are. Table 1: Okun coefficients 2000-2012 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain Euro zone
Source: Eurostat, SEB

2008-2009 0.28 0.21 0.90 0.55 0.20 0.32 0.00 0.67 0.74 1.15 0.12 0.14 0.10 0.39 0.00 0.18 1.96 0.44 EDITORS Mattias Brur & Tomas Lindstrm +46 8 763 85 06, + 46 8 763 80 28 Hence, to sum up, recent data suggest that the German labour market is more efficient than ever. Going forward, however, there are still major challenges such as raising the labour force participation rate (especially among women and older people) and attracting more skilled workers from around the world. Even so, our forecast for German unemployment is relatively optimistic; we predict that the unemployment rate (Eurostats definition) will average 5.7 percent both in 2013 and 2014 or slightly higher than today. In the euro zone, by contrast, the unemployment rate is expected to increase significantly further and to exceed 12 percent in 2013 and 2014.

0.40 0.82 0.86 0.74 0.22 0.62 0.63 3.16 0.50 0.59 0.86 0.59 0.59 0.71 0.71 0.31 1.08 0.43

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