On the strange story of German and US unemployment

When the banking crisis was at its peak in autumn 2008, the Scottish Government responded by organising a series of 'economic quadrilaterals' involving the Scottish Government, Scotland Office, CBI and our good selves. The third such meeting was held here at the STUC in September 2009.

I raised the issue of the stark differences in the way national labour markets had responded to the precipitous fall in output. Summarising very crudely,

• the US had seen a massive rise in unemployment but one roughly consistent with what could be expected given the fall in output and (inadequate) stimulus measures;
• Germany, despite having suffered one of the worst falls in output among the developed nations (what you would expect given its reliance on exports and the huge fall in world trade in late 08/early 09), had managed to maintain employment levels - unemployment hardly moved; and,
• Scotland (and the UK) was somewhere in between - unemployment had not risen to levels consistent with the fall in output.

The response from our friends in Scotland's foremost employer body was to argue that given the flexibility of the US labour market, it was to be expected that unemployment would surge. However, that same flexibility would ensure that unemployment would quickly plummet when growth resumed. The reverse was true for Germany: its more regulated labour market ensured a higher degree of 'stickiness'; unemployment would rise more slowly but would remain higher for longer. As is the way with the employer chaps, this view of the world was asserted, not argued.

Well, what is the situation 15 months on? Given growth resumed more than a year ago, surely US unemployment is plummeting? Surely the 'sticky' German labour market has experienced creeping unemployment that will prove difficult to tackle given the barriers to hiring and firing?

Not a bit of it. The latest US employment stats released today confirm unemployment rising to 9.8% in November ( a number of prominent commentators estimate real unemployment to be much higher but let's leave that aside for now); the 19th month in a row that unemployment has been over 9%.

On Tuesday the latest German figures were published showing unemployment falling for the 17th month in a row to an 18 year low of 6.7%.

What does this tell us? Well the STUC is big enough to acknowledge that this is not a clean experiment and that many other factors other than labour flexibility/regulation are at play. (Please note that this is something the employer bodies never do - they like the simple narrative. And they simplistically and relentlessly promote the virtues of labour market flexibility. They even managed to consistently overlook the small matter of unification when assessing the performance of the German labour market).

I would draw the following broad lessons:

• demand management works - despite Merkel's public commitment to austerity at home and abroad the German government's fiscal interventions were proportionately greater than the US's;
• active labour market interventions work - through keeping people in jobs, retraining for the upturn and keeping unemployment lower than it would otherwise be;
• the US is in a horrible mess and, given the political situation, there really is a chance that things will get much, much worse; and,
• it really is time to get over the infatuation with flexible labour markets.

Stephen Boyd - STUC