Japan, Germany, and the United States - labor markets in times of crisis: a comparative perspective

Abstract

The late 2000s-recession caused massive damage to the global economy. High unemployment, low consumer confidence, declining asset prices and national debt crises were but a few hardships that countries worldwide had to sustain. In terms of unemployment Japan, Germany, and the United States - three of the world’s biggest economies – were affected very differently. A look at unemployment levels reveal striking differences. In Germany, unemployment had for much of the 2000s endured levels far above eight percent, and at times close to twelve percent. When crisis hit in late 2007, however, unemployment remained remarkably low and remarkably stable, even dropping to seven percent at one point. Unemployment in the United States, on the other hand, had experienced a steady decline following the early 2000s-recession from six to four percent. When the crisis hit, the American labor market saw a precipitous rise in unemployment, which peaked at above twelve percent in late 2009. Japan, like the U.S., experienced a steady decline in unemployment leading up to the crisis. But unlike the U.S., Japan was able to keep its unemployment level below six percent when the crisis hit, despite a one percent rise.

My paper discusses the reasons for these different unemployment responses in the respective countries. Despite the economic grandeur these countries share, their labor markets are quite distinct from one another. Because of their different characteristics, economic downturns have different effects on unemployment. My investigation suggests that the observed responses can largely, although not exclusively, be explained by existing labor market characteristics. In short, the reason why the United States suffered a sharp rise in unemployment is that labor adjustment was about the only tool that American employers had (and have) at their disposal to deal with the crisis. Japanese and German employers, as my discussion suggests, were able to exploit other channels. Japanese and German labor markets could to a greater degree handle declining demand through transfers and wage and hour adjustments before resorting to layoffs. Furthermore, the governments of Japan and Germany engaged in massive work-share programs in order to prevent mass-layoffs. The American work-share effort, in contrast, was rather limited and ill-suited. In sum, Japan and Germany had more outlets available to relieve the labor market pressure caused by the crisis.