Labor Market Structure and Unemployment Problems in Recession

link here to article

This is a rather long, but informative study, of the ways in which labor market structure moderate or exacerbate unemployment rates in recession. Much of the discussion is about the differences between Denmark and Germany, but there are lessons for the US from this analysis. Denmark has excellent programs for retraining employees who have lost their jobs. This works very well during periods of full-employment but it works less well during a recession when there is a demand shock. In a demand shock recession there are fewer jobs to be retrained for.

Germany was the only OECD country to maintain full employment during the recession. It has two programs which encourage firms to cut down on hours worked instead of laying off employees. The government replaces some of lost income from shorter hours and workers can bank hours by working overtime or by working during vacations. They can use their banked hours during periods of low demand for hours. This kept employment levels from falling and kept wage income from falling and reducing aggregate demand further.

The US has the most "flexible" labor market structure among its peers. There are very few structural impediments to firing workers during a downturn. High costs for employer sponsored healthcare in the US also provides an incentive to fire workers, or to use part time labor during a demand shock. The Obama administration favors the use of programs, like those of Denmark, to retrain workers to meet the requirements of open jobs that employers are unable to fill with the available workforce. This does not work well in a demand shock recession when the fit between labor force skills and job requirements is less of an issue. The US spent more on stimulus relative to GDP than other countries but it suffered higher employment loss during the downturn than most OECD countries. Labor market structure made the difference.