The Jobs Market: Advantage US or Germany?
Different strategies for making the jobs market great again.
- How do the US and German labor markets compare with regard to their performance since the post-Lehman trough in February 2010?
- Germany and the US achieved comparable gains in employment despite very different rates of population growth.
- Germany enjoys a higher employment rate than the US thanks to thriving part-time employment.
- Success breeds complacency. Instead of boosting productivity, Germany has started to reverse some of its reforms.
How do the U.S. and German labor markets compare with regard to their performance since the post-Lehman trough in February 2010?
In that time, the U.S. economy has created 20 million new jobs, equivalent to an average monthly gain of 190,000 people. Over the same period, German employment has expanded at a rate of 40,000 for a total gain of more than 4 million.
In relative terms, the United States has outpaced Germany. Since early 2010, employment has increased by 1.5% year on year on average in the United States, compared to 1.1% in Germany.
Is it this fair to say that the United States has done a much better job? Not quite.
The bigger picture
Looking only at the almost nine years of the post-Lehman recovery gives an incomplete picture. The U.S. labor market is more cyclical than Germany’s. After moving broadly in tandem from 1999 to 2003, the United States surged ahead from 2004 to 2007 while Germany lagged behind.
Since the 2003-2005 reforms, German labor demand has increased strongly. In the 2008-2009 crisis, German businesses largely held on to their workers. Employment fell by a mere 250,000.
However, as the United States had built up excesses during the prior boom, especially in construction, it had to adjust much more in the recession: U.S. employment plummeted by 8.7m in 2008-2009.
As fewer German jobs were lost during the crisis, the country had less need to re-hire workers during the recovery. Taking the long view, we find that employment has increased by 0.8% annually in both countries since 1999.
Germany and the United States achieved comparable gains in employment despite very different rates of population growth of 0.9% yoy on average in the United States versus 0.1% in Germany since 1999.
The gap shows up in the employment rate. In the United States, the employment-to-population ratio dropped from 60% in 2007 to 55% in 2009, and has recovered only mildly to 58% since then.
Meanwhile, the ratio edged up in Germany even during the 2008-2009 crisis, from 58% to 59%, and has risen further to 63.5% now.
As a higher employment rate tends to make it more difficult to fill vacancies, it is quite natural that today’s job growth in Germany is not quite as dynamic as it is in the United States.
Germany enjoys a higher employment rate also thanks to thriving part-time employment. Importantly, however, in most cases it is tax incentives that make Germans, especially women, choose voluntarily not to work full-time.
The share of involuntary part time – i.e. people who want to work more, but don’t find a full-time job – is very low at 11% in Germany and 17% in the United States.
Cost to public finances
Over the previous 12 months, both U.S. and German jobs growth accelerated to average monthly increases of 210,000 and 50,000 respectively.
In Germany, this is likely to slow as economic growth has moderated over the course of 2018. In the United States, we expect strong employment gains to continue into 2019 after the growth spurt in 2018.
However, the United States is paying a price for stronger jobs growth with a widening deficit and more general concerns about fiscal sustainability. At the same time, the German government has run fiscal surpluses since 2014.
The German lesson is clear
Countries with structural rigidities and fiscal problems need to be better at creating jobs. Germany continues to reap the rewards of its 2003-2005 reforms. Strong demand for labor allows it to bring more Germans as well as EU and non-EU migrants into work.
However, success breeds complacency. Instead of boosting productivity, Germany has started to reverse some of its reforms.
The U.S. lesson is different
The Trump administration has rolled back some regulations, raised the incentive for businesses to invest and drawn workers on the sidelines back into the labor market.
Beyond augmenting supply, the United States would be well advised to refrain from unnecessary and costly stimuli to demand.