So here is another entry based mostly on some graphs I put together - or borrowed from the St. Louis Fed - based on BLS data and OECD statistics data. Inspired by a comment my macroecon professor made in class the other day I decided to compare four things: (1) the decline in output in the U.S. during the recession in 2008, (2) the decline in output in Germany at the same time, (3) the increase in unemployment in the U.S. during and after the recession, and (4) the increase in unemployment in Germany at the same time. The graphs of each of these four things are below (I used GDP as a proxy for output since it was easier to find that data) and the grey boxes in each graph correspond roughly to the period that the U.S. economy was technically in recession.
A couple of things should be obvious from these graphs. First, and most surprising to me, there is almost no increase in German unemployment associated with the recession. I hadn't expected there to be a U.S. sized increase in unemployment (that expectation was what prompted the whole exercise) but I had thought it would be larger than the roughly half a percent increase that that the graph shows.
That half a percent increase corresponds to roughly a ten percent increase in the overall level of unemployment. Contrast that to the five percent increase in the U.S. unemployment. As you can see from the graph, that's a drastic increase in the level of unemployment in the U.S. Roughly, 100% in fact.
Now look at the declines in output in each country around the same time, and would have, to some degree, caused the increases in unemployment. In the U.S. GDP dropped roughly 550 billion from it's peak in late 2007 to the low point in mid 2009. That's a decline of a little less than five percent. In Germany, by contrast, GDP peaked in mid to late 2008 and bottomed out around the same time in 2009 after a fall of about 2.2 billion or a little more than six percent.
What's remarkable to me about this is that a slightly smaller decline in GDP in the U.S. led to a massive increase in unemployment relative to the increase in Germany. Not only that, but in the U.S. the unemployment rate has remained high since the recession whereas in Germany it jumped up and then has resumed the steady decline seen since 2006.
Here is where the comment by my professor comes in. He suggested that the reason that the Germany unemployment rate didn't respond to the recession is that as the recession hit Germany paid out subsidies to companies to retain employees. So although German productivity dropped sharply in the recession (as compared to a smaller drop in the U.S., neither is shown here) that productivity drop meant that unemployment stayed low. In turn, this meant that once companies came out of the recession employees already had jobs and were not waiting for companies to return to hiring as they are in the U.S. How accurate this is I'm not sure but it seems reasonable. To my mind it also argues for a slightly more interventionist state when it comes to responding to recessions. Sure the government can stimulate demand by direct spending but it seems that if people where still employed they be more willing to go spend money and thus stimulate demand themselves and so a subsidy that encouraged companies to retain employees during a downturn might have been a more effective recovery package.
A final note about the U.S. GDP data. For all the talk of a gradual "U" shaped recovery the GDP data seems to suggest a fairly straightforward "V" recovery in output. So it isn't the economy that still needs to recover but the jobs market. However, this doesn't seem too likely in the near future. Someone is capturing that increase in output and it isn't workers. That leaves companies and executives and they aren't known to willingly give up profits.
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