The Great Recession of 2008-2009: Causes ... - Index of - IZA

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Table 2: Relationship between GDP growth (2009) and change in unemployment rate (from 2008 to 2009) - Australia, Canada, Turkey, United States and the EU Mild labour market Medium labour market Severe labour market impact impact impact Norway (1.0, -1.9) Australia (1.3, 1.3) United States (3.5, - Mild Malta (0.6, -1.5) Canada (2.2, -2.6) 2.4) economic Cyprus (1.7, -1.7) contraction France (1.7, -2.2) Greece (1.8, 2.0) Austria (1.0, -3.6) Bulgaria (1.2, -5.0) Denmark (2.7, -5.1) Belgium (0.9, -3.0) Czech Republic (2.3, - Spain (6.7, -3.6) Medium Germany (0.2, -5.0) 4.3) Slovakia (2.5, -4.7) economic Italy (1.1, -5.0) Sweden (2.1, -4.4) Turkey (2.8, -4.7) contraction Japan (1.1, 5.2) Luxembourg (0.5, -4.2) Netherlands (0.6, -4.0) United Kingdom (2.0, - 4.9) Severe economic contraction Romania (1.1, -7.1) Finland (1.8, -7.8) Croatia (1.2, -5.8) Hungary (2.2, -6.3) Slovenia (1.5, -7.3) Estonia (8.3, -14.1) Ireland (5.6, -7.1) Latvia (9.6, -18.0) Lithuania (7.9, -15.0) Source: IMF WEO Database April 2010, EUROSTAT Labour Force Survey Database; calculations are authors. Notes: Figures are annual. Figures in parentheses are for change in unemployment rate and GDP growth rate in 2009, respectively. Mild = less than or equal to the 25 th percentile for that variable; Medium = more than the 25 th percentile and less than the 75 th percentile; Strong = more than the 75 th percentile. Figure 6: The relationship between economic contraction and deterioration in the labour market - Australia, Canada, Turkey, United States and the EU Source: see Table 1. 25
Adjusting to a labour demand shock: evidence from OECD countries Overall, there are three main channels for adjustment to external shocks in labour demand at the firm-level: working time (hours worked), number of workers and wages/non-wage benefits. 31 In general, firms tend to adjust hours of work more rapidly than the number of workers due to cost considerations and the need to retain workers (due to firm-specific capital) (this dimension is also known as internal adjustment). The sensitivity of working hours to the business cycle also varies across sectors depending on the importance of these factors (OECD 2009). Cutting wages and other benefits of remaining workers may reduce labour costs, but has an adverse social impact. That said, nominal wages tend to be rigid due to institutional reasons and because employers are reluctant to cut wages. 32 Ultimately, a sharp drop in economic activity, leads to dismissals, mass layoffs, plant closures, and hiring freezes (external adjustment), which all contribute to rising unemployment that has been described above. During the global financial crisis, there has been considerable variation in the adjustment of working hours, wages and employment across countries. As captured in Table 3, adjustment in the manufacturing sectors of European countries can be categorized on the basis of two dimensions: external - employment and internal - working hours. In the resulting matrix, nine sets of countries emerge. For example, as much discussed during the crisis, employment in Germany has adjusted by a small margin, while hours have decreased more than in most European countries (lower left corner). In Germany’s case, this was driven by employer’s concerns of holding on to skilled workers, which was subsequently supported by a subsidized reduced working-time scheme (Kurzarbeit) and other internal flexibility measures that were utilized by employers to reduce hours worked (such as time accounts). In contrast, adjustment to employment has been higher in countries with more flexible labour markets such as the United Kingdom. In the majority of European countries, adjustment has taken place in both employment and hours to a moderate degree. 31 See Cazes et al. (2009) for more details. 32 See the discussion on wage rigidity in Akerlof and Shiller (2009) and Bewley (1999) 26
Page 1 and 2: DISCUSSION PAPER SERIES IZA DP No.
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