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What Explains the German Labor Market Miracle in the Great
ABSTRACTGermany 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. Considering the much greater decline in GDP in the Great Recession, however, the similarity of the declines in person-hours is a surprise.In this paper we investigate the reasons for this significant deviation from historical experience in the German labor market response to the 2008-09 recession. We highlight the fact that employment rose less than expected in the preceding expansion, given changes in GDP and labor costs, and that half of this shortfall can be explained using data on employers' business expectations. Employers lacked confidence that the boom would last, or were perhaps uncertain about how long it would last, and therefore they hired less than would have been predicted given contemporaneous conditions. Consequently, they were able to avoid costly layoffs when the recession arrived. Our survey of reporting by the Handelsblatt business newspaper confirms a general impression that firms downsized and restructured in the 2005-06 period, out of caution about the extent and persistence of the business upturn. The missing employment increase in the boom accounts for 41 percent of the missing employment decline in the recession, and 23 percent of that missing decline can be linked to pessimistic expectations in the expansion.If labor costs responded more flexibly than in the past to mitigate employment losses, this could also contribute to explaining the unusually mild labor market response to the recession.However, the fall in labor costs came too late to stem employment losses. Some previous analysts Although we cannot account for about 40 percent of the missing decline in employment, we believe that a per...