Archive for August, 2013

Impossible Germany

18 August 2013

The Eurozone has had famously high unemployment rates since the euro’s inception in 1999, and for most of that time Germany has been a key sufferer, with unemployment over 8%. Since the financial crisis broke in 2008, German economic policy has been mostly associated with austerity policies, which have predictably tended to worsen Europe’s employment situation. Yet Germany’s labor market appears to have been thriving over the past five years, with an enviable unemployment rate last month of 5.4%, second-lowest in the entire 27-country Eurozone. (Relatively tiny Austria has the lowest, 4.6%.)

eurozone-country-unemployment-rates

What accounts for the German labor market miracle? I’ve been pondering this for a while now.

First, is this miracle for real? In the US, for example, the official unemployment rate has lately been falling, yet the employment-to-population ratio has barely budged, largely because fewer people are entering the labor force (i.e., getting jobs or looking for jobs). Yet Germany’s labor force participation rate and employment-to-population ratio have been increasing. Has Germany suddenly changed its definitions of who is unemployed or not in the labor force? Apparently not, and it wouldn’t matter anyway, as these numbers are the International Labor Organization definitions of unemployment, the same as the US uses. Also, this is a fairly long-term pattern, back to 2005 (coincident with, though not necessarily caused by, Angela Merkel’s term as Chancellor following the 2005 elections).

On the other hand, perhaps Germany’s official count of the employed, like the US’s, includes a lot of part-time workers who want full-time work but cannot find it because of bad economic conditions. Indeed, The Telegraph reports:

nearly one-in-five German workers is in a tax-exempt mini-job, earning €450 a month or less. A government survey a few years ago found that nearly a third of mini-jobs workers were looking for a job with longer hours but were unable to find one.

Let’s do the math. <20% * <(1/3) = employment rate of 94.6%. Subtract 6% of 94.6%, and you’ve got 88.92%, or an unemployment rate of about 11%. This is roughly similar to the US situation, where counting involuntary part-time workers as unemployed would add 6.2 points to the unemployment rate. On the other hand, Germany’s “mini-jobs” are more a matter of government policy than their US counterparts. For more, see this Wall Street Journal article on mini-jobs, in which German experts call them dead-end jobs that provide no incentive for employers to move these workers to full-time or for the workers to give up their tax and welfare benefits for full-time work. Balance it out with this other Telegraph article that argues that mini-jobs are a helpful means of providing work.

All of this is quite different from the post I expected to write. I was going to mention how the euro’s recent weakness (for the past two years, it’s been down about 10-15% from its 2009 peak) helps Germany’s net exports. It does so both in the usual way and because Germany’s currency is surely cheaper under the euro than it would be if Germany were still on the Deutschmark. Crisis countries like Greece and Italy drag down the value of the euro, while whatever the high demand for German assets as financial safe havens does to raise the price of the euro is offset by reduced demand for other euro-country assets.

I was also going to mention Germany’s sluggish population growth and difficulty in attracting immigrants, which have caused the labor force to grow slowly. It’s easier to find jobs for a trickle of new labor force entrants than for a flood of them.

Finally, I was going to mention this 2011 National Bureau of Economic Research paper by Michael C. Burda and Jennifer Hunt, which finds the “German labor market miracle” to be real and attributes it to a hiring catch-up on the part of employers who were reluctant to hire early on in the 2000s expansion, “wage moderation” (unions accepting smaller pay increases, apparently), and “working time accounts,” seemingly similar to the “flex-time accounts” proposed by Chamber of Commerce Republicans, that allow employers to avoid paying overtime if the employee work week averages out to the standard amount. Note that the paper (or at least its abstract) does not mention “mini-jobs,” which may mean that mini-jobs are nothing new in Germany and that their use has not expanded much of late (I could not find anything much on the history of mini-jobs in my Googling).

All things considered, Germany’s labor market still looks a lot better than that of the rest of the Eurozone (except German-speaking Austria). I’d like to see a German equivalent of the comprehensive “U-6” unemployment rate that the US reports every month. My guess is that it would be very high, much like that of the US, but still showing dramatic improvement since 2005. They’re doing something right over there, but it’s hard to tell just what.

7.4%: Good news you can’t use

4 August 2013

Another first Friday, another BLS employment report, and the headline news is pretty good: In July the official unemployment rate fell to its lowest level, 7.4%, since 2008. If you were a White House publicist that morning, you could have noted that fact and also that the comprehensive U-6 unemployment rate (which includes discouraged job-seekers and involuntary part-timers) also fell, from 14.3% to 14.0%. And then you could have taken the rest of the day off.

The improvement in the U-6 unemployment rate was not enough to cancel out the previous month’s 0.5% point jump. The U-6 rate was below 14% in March, April, and May. The improvement in the official (U-3) rate was exactly counterbalanced by an 0.1% point drop in the labor force participation rate (to 63.4%). The employment/population ratio was unchanged (at 58.7% for all adults, and 75.9% for prime-age (25-54) year-old adults). The decline in participation defies easy explanation, as it involves three distinct subgroups — adult white males, white teenagers, and adult black females — but not others. (A notable recent trend, by the way, is for fewer people, especially young women, to not enter the work force.)

The unemployment rates come from the BLS’s survey of households. The BLS’s other survey, of employers (the “payroll survey”), is disappointing relative to the previous month’s. June’s report showed the economy with net job growth of 195,000, plus upward revisions of 70,000 jobs to the previous two months. July’s report has net job growth of 162,000, and downward revisions of 26,000 to the previous two months. At this month’s pace, it would take us a year longer to get back to 6% unemployment than at last month’s pace (using the handy Jobs Calculator of the Atlanta Fed).

The stock and bond markets seem to have gotten this report about right. The stock market barely budged, and the 10-year Treasury bond rate actually fell somewhat, from 2.72% to 2.60%, despite the improvement in the official unemployment rate. Both markets watch the employment reports with an eye toward the Fed’s next move on interest rates and “quantitative easing” (“QE”; special purchases of long-term bonds and mortgage-backed securities), all the more so after the Fed recently announced that it would start “tapering” off QE when unemployment falls to about 7.0% and start raising its key interest rate when unemployment falls to about 6.5%. While we’re a notch closer to those rates now, the trend does not look good. Treading water is about all this labor market is doing, and the markets seem to get that.