August 3, 2011 10:48 pm
Employment: A fix that functions
By Ralph Atkins and Matt Steinglass
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Jurgen Bos might have expected to have fared badly once severe recession struck in 2009. A year earlier, he had quit ABN Amro, the Dutch bank, to work freelance as a finance manager. Within months, the collapse of Lehman Brothers in the US had led to heavy job losses in the global financial sector. But Mr Bos barely noticed. “In fact,” he says, “work came in faster than I’d expected.”
In neighbouring Germany, the labour office in the quiet Bavarian town of Aschaffenburg is tranquil. The wooden chairs outside meeting rooms are unoccupied. Unemployment in the surrounding region is scarcely more than 3 per cent – “full employment”, in the eyes of most economists. “Our customer portfolio is shrinking,” admits Manfred Jäger, the unit’s director. “We were surprised that the crisis in the labour market was so quickly overcome.”
Germany, the Netherlands and a few other northern European countries tell another story, however. Their success is the flip side of the eurozone debt crisis. While the economic models of some in the 12-year-old monetary union have been blown apart – in Greece unemployment has hit 15 per cent – others have turned out to be surprisingly efficient.
“Everything that we feared about the Mediterranean model has proved right – only it was worse,” says André Sapir at Bruegel, the Brussels-based think-tank. “In Holland, Germany and the Nordic countries there was more of a longer-term view of the challenges that societies were facing.”
In the Netherlands, unemployment was just 4.2 per cent in May – the lowest in the bloc, according to internationally comparable data from the Paris-based Organisation for Economic Co-operation and Development. In Germany the rate was higher, at 6 per cent, but jobless totals have fallen steadily for two years to the lowest since pan-German figures began to be computed in the early 1990s.
Luck might have played its part and, as the outlook darkens once more in the eurozone and elsewhere, the current figures may not turn out to be enduring lows. But the two countries nonetheless offer lessons for others – in Europe and beyond – about the optimal balance between labour market regulation and creating, or preserving, jobs.
Bart van Ark, the Dutch chief economist at the Conference Board, a US research group, says Germany and the Netherlands might have found an elusive formula. “In the downturn, some continental European economies were at the sweet point on the curve – and may still be in the sweet point as long as economic growth remains pretty mediocre.”
Initially, Dutch and German labour market performance left economists scratching their heads. A well-established principle – named Okun’s law after Arthur Okun, a US economist – finds an almost mechanical link between declines in output growth and rises in unemployment. But after the collapse of Lehman, jobless figures in the two countries refused to follow the textbooks.
In The Hague, “the central planning bureau started predicting the unemployment rate using its econometric model and arrived at 9-10 per cent”, recalls Jules Theeuwes of the SEO research group. “But the real numbers kept coming in at 4-5 per cent. In the beginning they said, ‘Oh, there’s a lag’, but then half a year later nothing had happened and they had to start revising their estimations downward ... Something has dramatically changed in the Dutch economy.”
.
US unemployment figures stayed closer to the rule book. Between a high point at the end of 2007 and the second quarter of 2009, gross domestic product plunged by 5.1 per cent. By the second quarter of this year, economic activity had recovered to a level 0.4 per cent lower than the pre-crisis peak. But during the same period unemployment rose by more than 4 percentage points.
Dutch GDP slumped by a similar amount – 4.8 per cent – during the recession before recovering, less strongly than the US, to 1 per cent below its pre-crisis peak. But unemployment is just 1 percentage point higher than when the economy was at its best. In Germany, the peak-to-trough fall in GDP, at 6.6 per cent, was much sharper. Economic activity has since returned to the pre-crisis level, but the latest unemployment rate is almost 2 percentage points lower than it was.
Several explanations have emerged. Some point to circumstances in Germany and the Netherlands at the start of the crisis. Both had ageing populations, which restricted the availability of skilled labour. They had also built up strong, profitable manufacturing sectors able to benefit from the continuing rapid expansion of emerging market economies, especially China.
Nout Wellink, until recently Dutch central bank governor, says: “Profits were at a record high. If profits were not at a record high, our unemployment would have been much higher.” In contrast, countries such as Spain and Ireland suffered the collapse of a main pillar of their economies – the construction and housing sectors.
The demographic squeeze and demand for skilled workers created a powerful incentive to avoid the widespread firing seen in the US. “Employers did everything they could to hold on to their workers – to be ready for the next take-off,” recalls Professor Joop Schippers of Utrecht university. As in Germany, some felt a social responsibility to keep jobless queues as short as possible.
But more important was “the idea of preventing the destruction of human capital”, he says. Germans were further encouraged by state-financed “short-time working”, a scheme allowing companies to maintain sometimes idle workforces, mimicked in the Netherlands.
“In the US,” says Mr van Ark at the Conference Board, “there was this view that in order to face the crisis in a deregulated, very competitive environment you had to cut your employee numbers quickly in order to survive. It seems to me there was an element of overreaction. In parts of Europe, the bet was that you could hang on for a year or a bit longer – and it worked.”
.
. . .
.
But from an economic point of view, labour hoarding is not necessarily desirable. European policymakers, including the European Central Bank, feared it would delay the restructuring needed to cope with changed global economic circumstances. One result in the eurozone was a sharp fall in labour productivity, which was not the case in the US. Stefano Scarpetta, labour market specialist at the OECD, says governments should now move away from policies that encourage hoarding, and “convert them into measures to promote job creation”.
Greece and others have shown the perils of delaying structural reforms and allowing a dangerous loss of competitiveness to develop. “Countries that had acquired high debts were countries that were not doing very well ... they were using public debt to push adjustment into the future,” says Mr Sapir at Bruegel. In Germany and the Netherlands, however – both of which had already undertaken broad economic reforms prior to the recession – there was arguably little immediate need for large-scale changes to their economic models.
Mr Wellink says the Dutch labour market is “completely different from 10 years ago”, with increasing numbers of part-time employees, workers on limited period contracts and self-employed people providing a flexible buffer able to absorb global economic shocks. “The flexibility in a major part of the labour market is basically the reason for our success.”
Mr Bos, the finance manager, is an example of that flexibility. He is a “ZZP-er” – an acronym for the Dutch phrase meaning “independent without employees”. Until 2001, such freelancers had to register in a specific profession and possess diplomas in the relevant fields. With those rules now scrapped, freelancers comprise almost 10 per cent of the Netherlands’ workforce. In Germany, a study last month by the federal statistics office showed three-quarters of the increase in employment last year was through “atypical” jobs, including temporary and part-time work.
Germany and the Netherlands also took steps to encourage the unemployed back into the labour force. Germany’s Hartz reforms, introduced almost a decade ago, reduced benefits and increased incentives for the jobless to seek work.
Even in Aschaffenburg, where unemployment is barely a problem, the regional labour office has a staff of 430. For the past few years, it has been piloting a project that increased the number of frontline staff finding jobs for the unemployed – resulting in net savings as benefits fell. “The lesson we have drawn is that we have to be flexible and react swiftly to changes in the labour market,” says Mr Jäger, director.
Such steps are often unpopular. In the Netherlands, the increasing numbers of self-employed, many of whom would like permanent jobs, is seen as disguising the true level of unemployment. German trade unions complain that the country’s economic rebound has failed to create “proper jobs”.
.
. . .
.
Northern European nations have generally won broad social agreement on the need for increased flexibility, however. “What some European countries have done is to arrange institutions and pay systems in such a way as to make more flexible working arrangements socially acceptable,” says Mr van Ark.
The Netherlands’ “polder model” – whereby labour representatives, government and employers agree on a common approach to solving the country’s economic difficulties – allowed swift agreement on steps needed to assuage the worst effects of the 2009 recession. In such a small country, it is possible for “the elite to meet each other and feel responsible for the outlook as a whole”, explains Prof Schippers at Utrecht university.
In Germany, too, there are strong, if less formalised, links between trade unions and employers – which, for instance, have allowed the country to pursue a policy of wage moderation for much of the past decade, boosting international competitiveness. “There are important lessons to be learnt from the Netherlands and Germany, and the effective collaboration between the social partners – the employers and the workers – that actually allowed companies to find the best way to respond to what was a very large shock,” says Mr Scarpetta at the OECD.
Reducing working hours – rather than sacking staff – in response to a temporary fall in demand would be one example. “To some extent, over the past two decades, the US de-invested in the underlying labour market institutions.”
For his part, Mr Bos expects to remain part of those high Dutch employment figures. He is on a temporary contract at a property investment firm, and feels sure of finding more freelance work when that project ends. Looking back on his career decision three years ago, he concludes: “I’ve never had a moment’s regret.”
US: A breakdown in the social contract
If the resilience of northern Europe’s labour market after the global crisis was a pleasant surprise, what happened in the US was more like a horror film in which the shocks just kept on coming, writes Robin Harding. Unemployment rose by almost 5 percentage points for a 5 per cent decline in output – defying Okun’s law in the opposite direction to northern continental Europe. Two years into a recovery, the rate of joblessness, at 9.2 per cent, is only a percentage point below its peak.
Even that understates the weakness: participation in the US labour force has fallen from 66 per cent to 64 per cent of the population and shows no signs of picking up again.
Part of the mystery was resolved last week when the Bureau of Economic Analysis revised its numbers to show that the US recession of 2008-09 was worse than previously thought. But the biggest difference to Europe is the behaviour of companies.
“To me the central thing here is the decline of the implicit contract between workers and firms,” says Ethan Harris at Bank of America Merrill Lynch in New York. “Firms are laying off very aggressively and then in the recovery only hiring when they really have to.”
Rather than hoarding labour during recessions in return for loyalty when times are good, Mr Harris says the US has become a “just in time” labour market, where companies respond very quickly to any perceived decline in demand by cutting jobs. US corporate success in making the same amount with fewer workers is evident from productivity growth. Output per hour worked rose by 3.7 per cent in 2009 and by 3.9 per cent in 2010.
A crucial question is whether this can continue. A feature of the surge in productivity growth is that capital investment was not especially high – companies got more out of existing workers rather than replacing them with machines. In the first quarter of 2011, the pace of productivity growth slowed to an annualised 1.8 per cent. If companies have exhausted their ability to squeeze more out of their workers, they may have to start hiring. However, unless demand takes off, nobody expects them to do so rapidly.
As with geography, so with employment: the UK sits between northern continental Europe and the US, writes Chris Giles. Joblessness has risen and employment fallen, but not nearly as much as the movement in output. Relief is widespread at the relatively strong performance of Britain’s labour market, but there is angst at the consequent fall in labour productivity.
That is partly because companies hoarded labour and partly because jobs were lost in some of the most productive parts of the UK economy – financial services and oil extraction. With a feeble recovery and little action in the labour market, the two big questions are whether productivity growth can pick up and whether unemployment will return to its earlier levels of around 5 per cent.
The government’s hope is that both will happen as a robust recovery takes hold. But in its latest mission to the UK, the International Monetary Fund cast doubt on the likelihood of rapid reductions in unemployment. The IMF suggested that the natural rate was above 6 per cent, based on the average in the past economic cycle, rather than the 5.25 per cent assumed by the UK authorities.
If that scepticism is borne out, the capacity for the UK economy to grow rapidly will be diminished and the five-year austerity programme is likely be even more gruelling than people in Britain expect.
Jurgen Bos might have expected to have fared badly once severe recession struck in 2009. A year earlier, he had quit ABN Amro, the Dutch bank, to work freelance as a finance manager. Within months, the collapse of Lehman Brothers in the US had led to heavy job losses in the global financial sector. But Mr Bos barely noticed. “In fact,” he says, “work came in faster than I’d expected.”
In neighbouring Germany, the labour office in the quiet Bavarian town of Aschaffenburg is tranquil. The wooden chairs outside meeting rooms are unoccupied. Unemployment in the surrounding region is scarcely more than 3 per cent – “full employment”, in the eyes of most economists. “Our customer portfolio is shrinking,” admits Manfred Jäger, the unit’s director. “We were surprised that the crisis in the labour market was so quickly overcome.”
Click to enlarge
Such anecdotes might seem remarkable elsewhere in the world. Amid a slow recovery from the global economic storms of the past four years, stubbornly high unemployment has emerged as one of the biggest challenges for policymakers. Sluggish growth in the US is failing to dent jobless totals. In June, the unemployment rate rose from 9.1 per cent to 9.2 per cent, and nervousness surrounds the July figure, due out on Friday. The eurozone average is close to 10 per cent. In Spain, more than one in five workers is out of a job.
Germany, the Netherlands and a few other northern European countries tell another story, however. Their success is the flip side of the eurozone debt crisis. While the economic models of some in the 12-year-old monetary union have been blown apart – in Greece unemployment has hit 15 per cent – others have turned out to be surprisingly efficient.
“Everything that we feared about the Mediterranean model has proved right – only it was worse,” says André Sapir at Bruegel, the Brussels-based think-tank. “In Holland, Germany and the Nordic countries there was more of a longer-term view of the challenges that societies were facing.”
In the Netherlands, unemployment was just 4.2 per cent in May – the lowest in the bloc, according to internationally comparable data from the Paris-based Organisation for Economic Co-operation and Development. In Germany the rate was higher, at 6 per cent, but jobless totals have fallen steadily for two years to the lowest since pan-German figures began to be computed in the early 1990s.
Luck might have played its part and, as the outlook darkens once more in the eurozone and elsewhere, the current figures may not turn out to be enduring lows. But the two countries nonetheless offer lessons for others – in Europe and beyond – about the optimal balance between labour market regulation and creating, or preserving, jobs.
Bart van Ark, the Dutch chief economist at the Conference Board, a US research group, says Germany and the Netherlands might have found an elusive formula. “In the downturn, some continental European economies were at the sweet point on the curve – and may still be in the sweet point as long as economic growth remains pretty mediocre.”
Initially, Dutch and German labour market performance left economists scratching their heads. A well-established principle – named Okun’s law after Arthur Okun, a US economist – finds an almost mechanical link between declines in output growth and rises in unemployment. But after the collapse of Lehman, jobless figures in the two countries refused to follow the textbooks.
In The Hague, “the central planning bureau started predicting the unemployment rate using its econometric model and arrived at 9-10 per cent”, recalls Jules Theeuwes of the SEO research group. “But the real numbers kept coming in at 4-5 per cent. In the beginning they said, ‘Oh, there’s a lag’, but then half a year later nothing had happened and they had to start revising their estimations downward ... Something has dramatically changed in the Dutch economy.”
.
US unemployment figures stayed closer to the rule book. Between a high point at the end of 2007 and the second quarter of 2009, gross domestic product plunged by 5.1 per cent. By the second quarter of this year, economic activity had recovered to a level 0.4 per cent lower than the pre-crisis peak. But during the same period unemployment rose by more than 4 percentage points.
Dutch GDP slumped by a similar amount – 4.8 per cent – during the recession before recovering, less strongly than the US, to 1 per cent below its pre-crisis peak. But unemployment is just 1 percentage point higher than when the economy was at its best. In Germany, the peak-to-trough fall in GDP, at 6.6 per cent, was much sharper. Economic activity has since returned to the pre-crisis level, but the latest unemployment rate is almost 2 percentage points lower than it was.
Several explanations have emerged. Some point to circumstances in Germany and the Netherlands at the start of the crisis. Both had ageing populations, which restricted the availability of skilled labour. They had also built up strong, profitable manufacturing sectors able to benefit from the continuing rapid expansion of emerging market economies, especially China.
Nout Wellink, until recently Dutch central bank governor, says: “Profits were at a record high. If profits were not at a record high, our unemployment would have been much higher.” In contrast, countries such as Spain and Ireland suffered the collapse of a main pillar of their economies – the construction and housing sectors.
The demographic squeeze and demand for skilled workers created a powerful incentive to avoid the widespread firing seen in the US. “Employers did everything they could to hold on to their workers – to be ready for the next take-off,” recalls Professor Joop Schippers of Utrecht university. As in Germany, some felt a social responsibility to keep jobless queues as short as possible.
But more important was “the idea of preventing the destruction of human capital”, he says. Germans were further encouraged by state-financed “short-time working”, a scheme allowing companies to maintain sometimes idle workforces, mimicked in the Netherlands.
“In the US,” says Mr van Ark at the Conference Board, “there was this view that in order to face the crisis in a deregulated, very competitive environment you had to cut your employee numbers quickly in order to survive. It seems to me there was an element of overreaction. In parts of Europe, the bet was that you could hang on for a year or a bit longer – and it worked.”
.
. . .
.
But from an economic point of view, labour hoarding is not necessarily desirable. European policymakers, including the European Central Bank, feared it would delay the restructuring needed to cope with changed global economic circumstances. One result in the eurozone was a sharp fall in labour productivity, which was not the case in the US. Stefano Scarpetta, labour market specialist at the OECD, says governments should now move away from policies that encourage hoarding, and “convert them into measures to promote job creation”.
Greece and others have shown the perils of delaying structural reforms and allowing a dangerous loss of competitiveness to develop. “Countries that had acquired high debts were countries that were not doing very well ... they were using public debt to push adjustment into the future,” says Mr Sapir at Bruegel. In Germany and the Netherlands, however – both of which had already undertaken broad economic reforms prior to the recession – there was arguably little immediate need for large-scale changes to their economic models.
Mr Wellink says the Dutch labour market is “completely different from 10 years ago”, with increasing numbers of part-time employees, workers on limited period contracts and self-employed people providing a flexible buffer able to absorb global economic shocks. “The flexibility in a major part of the labour market is basically the reason for our success.”
Mr Bos, the finance manager, is an example of that flexibility. He is a “ZZP-er” – an acronym for the Dutch phrase meaning “independent without employees”. Until 2001, such freelancers had to register in a specific profession and possess diplomas in the relevant fields. With those rules now scrapped, freelancers comprise almost 10 per cent of the Netherlands’ workforce. In Germany, a study last month by the federal statistics office showed three-quarters of the increase in employment last year was through “atypical” jobs, including temporary and part-time work.
Germany and the Netherlands also took steps to encourage the unemployed back into the labour force. Germany’s Hartz reforms, introduced almost a decade ago, reduced benefits and increased incentives for the jobless to seek work.
Even in Aschaffenburg, where unemployment is barely a problem, the regional labour office has a staff of 430. For the past few years, it has been piloting a project that increased the number of frontline staff finding jobs for the unemployed – resulting in net savings as benefits fell. “The lesson we have drawn is that we have to be flexible and react swiftly to changes in the labour market,” says Mr Jäger, director.
Such steps are often unpopular. In the Netherlands, the increasing numbers of self-employed, many of whom would like permanent jobs, is seen as disguising the true level of unemployment. German trade unions complain that the country’s economic rebound has failed to create “proper jobs”.
.
. . .
.
Northern European nations have generally won broad social agreement on the need for increased flexibility, however. “What some European countries have done is to arrange institutions and pay systems in such a way as to make more flexible working arrangements socially acceptable,” says Mr van Ark.
The Netherlands’ “polder model” – whereby labour representatives, government and employers agree on a common approach to solving the country’s economic difficulties – allowed swift agreement on steps needed to assuage the worst effects of the 2009 recession. In such a small country, it is possible for “the elite to meet each other and feel responsible for the outlook as a whole”, explains Prof Schippers at Utrecht university.
In Germany, too, there are strong, if less formalised, links between trade unions and employers – which, for instance, have allowed the country to pursue a policy of wage moderation for much of the past decade, boosting international competitiveness. “There are important lessons to be learnt from the Netherlands and Germany, and the effective collaboration between the social partners – the employers and the workers – that actually allowed companies to find the best way to respond to what was a very large shock,” says Mr Scarpetta at the OECD.
Reducing working hours – rather than sacking staff – in response to a temporary fall in demand would be one example. “To some extent, over the past two decades, the US de-invested in the underlying labour market institutions.”
For his part, Mr Bos expects to remain part of those high Dutch employment figures. He is on a temporary contract at a property investment firm, and feels sure of finding more freelance work when that project ends. Looking back on his career decision three years ago, he concludes: “I’ve never had a moment’s regret.”
US: A breakdown in the social contract
If the resilience of northern Europe’s labour market after the global crisis was a pleasant surprise, what happened in the US was more like a horror film in which the shocks just kept on coming, writes Robin Harding. Unemployment rose by almost 5 percentage points for a 5 per cent decline in output – defying Okun’s law in the opposite direction to northern continental Europe. Two years into a recovery, the rate of joblessness, at 9.2 per cent, is only a percentage point below its peak.
Even that understates the weakness: participation in the US labour force has fallen from 66 per cent to 64 per cent of the population and shows no signs of picking up again.
Part of the mystery was resolved last week when the Bureau of Economic Analysis revised its numbers to show that the US recession of 2008-09 was worse than previously thought. But the biggest difference to Europe is the behaviour of companies.
“To me the central thing here is the decline of the implicit contract between workers and firms,” says Ethan Harris at Bank of America Merrill Lynch in New York. “Firms are laying off very aggressively and then in the recovery only hiring when they really have to.”
Rather than hoarding labour during recessions in return for loyalty when times are good, Mr Harris says the US has become a “just in time” labour market, where companies respond very quickly to any perceived decline in demand by cutting jobs. US corporate success in making the same amount with fewer workers is evident from productivity growth. Output per hour worked rose by 3.7 per cent in 2009 and by 3.9 per cent in 2010.
A crucial question is whether this can continue. A feature of the surge in productivity growth is that capital investment was not especially high – companies got more out of existing workers rather than replacing them with machines. In the first quarter of 2011, the pace of productivity growth slowed to an annualised 1.8 per cent. If companies have exhausted their ability to squeeze more out of their workers, they may have to start hiring. However, unless demand takes off, nobody expects them to do so rapidly.
UK: The productivity poser
As with geography, so with employment: the UK sits between northern continental Europe and the US, writes Chris Giles. Joblessness has risen and employment fallen, but not nearly as much as the movement in output. Relief is widespread at the relatively strong performance of Britain’s labour market, but there is angst at the consequent fall in labour productivity.
That is partly because companies hoarded labour and partly because jobs were lost in some of the most productive parts of the UK economy – financial services and oil extraction. With a feeble recovery and little action in the labour market, the two big questions are whether productivity growth can pick up and whether unemployment will return to its earlier levels of around 5 per cent.
The government’s hope is that both will happen as a robust recovery takes hold. But in its latest mission to the UK, the International Monetary Fund cast doubt on the likelihood of rapid reductions in unemployment. The IMF suggested that the natural rate was above 6 per cent, based on the average in the past economic cycle, rather than the 5.25 per cent assumed by the UK authorities.
If that scepticism is borne out, the capacity for the UK economy to grow rapidly will be diminished and the five-year austerity programme is likely be even more gruelling than people in Britain expect.
.
Copyright The Financial Times Limited 2011.
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