Tuesday, September 22, 2009

Output, employment and productivity during the crisis

While most advanced economies have displayed significant drops in GDP during the last years, the behavior of labor market variables (employment, unemployment, number of hours) has been quite different across countries.

In countries such as the US or Spain we have seen a large decline in employment/hours and the corresponding increase in unemployment. In countries such as Germany or France or Sweden, employment and hours have fallen much less.

Below is data on labor productivity measured as GDP per hour worked in four countries (data is annual so we are missing the first quarters of 2009). In the case of Sweden and Germany we can see that the fall in GDP has been much larger than the decrease in hours worked leading to a decline in productivity. In the case of the US productivity has remained stable. In the case of Spain the fall in employment and hours has been much larger than the decrease in GDP which has produced a doubling of the productivity growth rates in 2007/08 relative to the 2003-06 period.

Behind these figures we probably have a composition effect (different sectors being affected differently by the crisis) but also different labor market responses to the crisis, where in some cases there has been a conscious effort to reduce the impact on employment.

Antonio Fatás

Update (Sept 23): some have emailed me asking for an explanation of the differences among these countries. I do not have a great answer, my last paragraph was an attempt to put forward some hypothesis. It could be that the sectors that are being affected in a country like Sweden are the most productive ones, while in a country like Spain they are the least productive ones (e.g. construction). I have no evidence that this is the case but it is a plausible mechanical explanation. The second explanation that I proposed is probably more realistic: in some countries (Germany, Sweden) there has been a conscious effort with the help of trade unions to reduce the impact of the crisis on employment (e.g. accept a pay cut if the level of employment is maintained). We have not seen this in the US. In the case of Spain, the dual structure of the labor market has led to a large termination of temporary contracts and a significant reduction in employment.