Although many nations were severely affected by the recent worldwide recession, the impact on the labor market of various countries—including unemployment rates—varied considerably. In a notable example, a paper by Brookings Governance Studies Fellow Elisabeth Jacobs shows that the recession had much less drastic effects on Germany’s workers than on U.S. workers. The prime causes for Germany’s success can be traced to the country’s coordinated market economy, which emphasizes long-term objectives, and to specific labor market policies intended to reduce the shocks of economic reversals. The traditional U.S. focus on short-term gains and protections may not be a model that continues to serve our economy—and our workers—well in competitive global markets. To help us weather future economic reversals with less pain, our leaders may want to examine some aspects of Germany’s approach, including the following:
- Recognizing and increasing the cost of employee turnover. U.S. employers tend to rely on layoffs when demand for their products or services slackens. The costs of this short-term strategy—in unemployment compensation and in rehiring or retraining workers when demand rises—are substantial. In contrast, German employers tend to put more workers on shorter hours, and public and private programs are available that help them do so (short-time compensation and “working time accounts”). Labor market policies reinforce incentives to hoard human capital because of the country’s high-skill workforce, because employers are responsible for worker training and because of high levels of employment protection.
- Align incentives through coordinated reforms. Simply pushing for a short-time compensation program for the United States is unlikely to stabilize the workforce in future recessions. Reforms to any one part of the system must take into consideration the incentives created by other employment policies and must align incentives for employers and workers. In Germany, employers benefit from the availability of a flexible working time toolkit and public policies incentivize labor market participation among individual workers. Unemployment benefits are more generous in both value and duration, employment training and services are far more intense and rigorous, subsidies and incentives for re-employment are far more widespread and generous and employment protection remains far stronger than in the United States. Taken together, this package of policies stabilizes the workforce and the entire German economy.
- Encourage long-term financing mechanisms. The ability of a corporation to form long-term commitments—including long-term employment commitments to its workers—depends on its ability to raise capital from sources that share a long time horizon. New institutions, such as the proposed Infrastructure Bank, may help promote the long view in the face of a U.S. investment culture focused almost exclusively on short-term gains.
- Increase the federal role in the unemployment insurance system, to allow for greater coordination and alignment of incentives for employers. The United States is an outlier in the developed world with respect to unemployment insurance; most other post-industrial nations have federalized programs run by the national government. Our fragmented, 50-state approach creates administrative complexity and costs for businesses operating across state lines and, more important makes policy coordination and reform virtually impossible.
The evolution of Germany’s labor market policies toward a system of aligned incentives that supports workforce participation and a more equal sharing of the economic impact of lean economic times, came about despite intense political obstacles. The same level of intensity of opposition would face those seeking reforms in the U.S. labor market. Nevertheless, Germany’s success—accomplished by a combination of factors including timing, leadership, and widespread recognition of past inefficiencies—shows that reform can happen despite the strength of entrenched interests.