BPEA | Spring 2011

What Explains the German Labor Market Miracle in the Great Recession? The Evolution of Inflation Dynamics and the Great Recession

Jennifer Hunt and
Jennifer Hunt headshot
Jennifer Hunt Professor of Economics - Rutgers University
Michael C. Burda
Michael C. Burda Professor of Economics - Humboldt University Berlin
Discussants: John Haltiwanger and
John Haltiwanger Professor of Economics - University of Maryland
Michael W. L. Elsby
Michael W. L. Elsby University of Edinburgh

Spring 2011

Germany experienced an even deeper fall in GDP in the Great
Recession than the United States, with little employment loss. Employers’
reticence to hire in the preceding expansion, associated in part with a lack of
confidence it would last, contributed to an employment shortfall equivalent
to 40 percent of the missing employment decline in the recession. Another
20 percent may be explained by wage moderation. A third important element was
the widespread adoption of working time accounts, which permit employers to
avoid overtime pay if hours per worker average to standard hours over a window
of time. We find that this provided disincentives for employers to lay off workers
in the downturn. Although the overall cuts in hours per worker were consistent
with the severity of the Great Recession, reduction of working time account
balances substituted for traditional government-sponsored short-time work.