Comparing and Contrasting Germany and Denmark’s Recessions

John Schmitt from CEPR has a new paper out, Labor Market Policy in the Great Recession: Some Lessons from Denmark and Germany (pdf).


This paper reviews labor-market performance of Denmark and Germany during the Great Recession. From the mid-1990s through the onset of the Great Recession, Denmark had what were arguably the most successful labor-market outcomes in the OECD, but the country has suffered in recent years. Germany, on the other hand, struggled with high unemployment, slow job growth, and rising wage inequality through much of the period between unification and the onset of the Great Recession, but has outperformed the rest of the OECD since. Labor-market institutions may explain the different experiences of the two economies. Danish institutions – built around numerically flexible employment levels and strong income security for workers – appear to perform well when the economy is at or near full employment. In good times, the country’s expensive active labor market policies work to connect unemployed workers to available jobs. In a severe downturn, however, where the overwhelming cause of unemployment is a lack of aggregate demand, institutions that encourage adjustment through employment are a liability and policies that seek to “activate” workers are not particularly effective. German labor-market institutions, which emphasize job security by keeping workers connected to their current employers, may have drawbacks when the economy is operating near full employment because they may discourage the efficient reallocation of workers from firms and industries where demand is falling to firms and industries where demand is on the rise. These same institutions, however, appear to have been well-suited for coping with the Great Recession because they encouraged firms to cut hours rather than workers, sharing the burden of the downturn more widely and helping firms keep their workforce in place and ready for the subsequent upturn.

A few thoughts. One is that there’s no not having a labor policy – it’s just a question of how to set it up. The second is that the implicit argument embedded in the neoliberal reforms of the past 30 years in the United States – slow unionization, remove legal protections for workers, switch from welfare to EITC and various credits for working, etc. – requires there to be actual jobs available. If there’s a huge recession where jobs aren’t available, the neoliberal labor market is uniquely situated to have trouble surviving in one piece. In Schmitt’s analysis there’s a tradeoff between a labor force that does well in normal times and terribly in bad times and one that does worse in normal times but survives harder times stronger. Do we have the worst of both?

A third point is a intra-distributional issue – does this need to be country wide to be stable? A not entirely surprising attack we’ve seen in the past two years has been on public workers, an attack driven in part because of the stability through recessions. I know a lot of government workers who have done what Germany has done – furlough days, etc. That there hasn’t been the widespread pain that we’ve seen in the private hasn’t driven the private workforce to also experiment with different types of labor force legal protections.

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