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Labor market policies GFC - Camilla FIORINA

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Labor Market Policies in Response
to the Global Financial Crisis
A Comparative Analysis
Camilla FIORINA
M2 IMPF – 2019/2020
Table of Contents
1 - INTRODUCTION
3
2 - THEORETICAL BACKGROUND: FACTORS INFLUENCING THE LABOR MARKET IMPACT OF THE
CRISIS
4
3 - COUNTRY CASE STUDIES
6
3.1 - The United States
6
3.2 - The European Union
3.2.1 - Germany
3.2.2 - Denmark
3.2.3 - Spain
7
7
8
9
3.3 - Asia and the Pacific
10
4. CONCLUSION
12
5. REFERENCES
13
6. APPENDIX
14
2
1 - Introduction
Economists use to say that "when America sneezes, the world catches a cold".
The years between 2002 and 2007 were characterized by a synchronized global boom, with high
growth rates, especially in developing countries. In 2006, however, a series of insolvencies in the
subprime segment of the U.S. real estate market caused the burst of an housing bubble, triggering
a severe financial crisis that hit the U.S. economy from mid 2007. The financial crisis soon had an
impact on the real economy and, by the end of 2007, the United States officially entered into
recession. The crisis driven by contagious financial and economic mechanisms, quickly spread
around the world, hitting both developed and developing countries, and rapidly evolved into a
global employment downturn. Throughout the paper we will refer to this period as “Great
Recession” or “Global Financial Crisis”.
By 2008, all regions of the world were registering slowdowns in the growth of employment.
Between 2008 and 2009 average employment growth dropped from 1,9% to -1,2% in G20 countries,
many of which experienced historically high levels of employment losses (see Figure 1, panel A and
B).
The first countries to be affected were United States and United Kingdom, at the time the two main
financial centers of the world. In other developed countries job losses came with a slight delay,
mainly as a consequence of contraction in aggregate demand. In the European Union, 6.2 million
jobs have been lost by 2010, and in some member states the situation worsened significantly in
2012, with the advent of the sovereign debt crisis.
The impact on the emerging G20 economies is mainly due to the decline in exports and commodity
prices, which led to a loss of 2.5 million jobs in the second and third quarters of 2008. (Eichhorst et
al. (2010))
By the end of 2010, the average G20 unemployment rate reached 9%, and in many countries it
continued to rise until 2013, by many considered the end year of the recession.
Nevertheless, the impact of the crises varied widely from country to country, included within the
same geographical region. This heterogeneity can be appreciated when looking at the correlation
between changes in output and variation in employment, known as the Okun’s law. Figure 2 (Panel
A and B) reports the variability of the Okun’s correlation, which increased importantly during the
Great Recession.
How different labor markets have reacted to the Great Recession depends on a combination of
economic and institutional factors which is highly-country specific. The aim of this paper is to
understand which factors play a role in defining this reaction and to assess their relative importance.
The work is composed of two macro sessions. The first part consists in a theoretical introduction to
the factors that have determined job markets’ response to the Great Recession. In session 2 some
of the most significant national experiences will be examined in order to appreciate, empirically,
how countries have relied on different combination of tools and mechanisms to stabilize their labor
markets; in particular this session includes the case study of United States, Germany, Denmark,
Spain and a selection of Asian labor markets, including Japan and Australia. Session 4 concludes.
3
2 - Theoretical background: factors influencing the labor market impact of
the crisis
During and after the Great Recession, labor markets have experienced divergent trends which are
only partly due to differences in growth rates. In fact, the ability of different labor markets to limit
job losses during the crisis reflects a combination of factors.
First, the structure of the economy, understood as the relative importance of the sectors that were
most vulnerable during the crisis, is relevant. For example, the construction sector, which is one of
the major employer in Spain, has been hard hit by the bursting of the real estate bubble. Or the
United Kingdom, recognized as the financial center of Europe, has suffered most from the
consequences of the financial crisis.
In addition, the availability of public resources for fiscal stimulus packages has played an important
role in alleviating the negative effects of the crisis. Some countries, such as China or Thailand, have
allocated the equivalent of 10% of their GDP to this type of measures while other countries, in
particular the eurozone's periphery, have been penalized by restrictions on their public debt.
Finally, a key role is played by the capacity of the labor market institutions – intended as the
combination of Employment Protection Legislation (EPL), wage setting mechanisms, unemployment
benefits and active labor market policies (ALMPs) which characterize the labor market of each
country – to absorb and accommodate shock.
Blanchard et al. (2014) argue that countries should design their labor market institutions to
maximize both micro flexibility and macro flexibility while protecting workers and preserve existing
business relations. This is not a simple task, and implies delicate tradeoffs.
Macro flexibility is defined as the capacity of an economy to keep low and stable unemployment
rates in presence of a macroeconomic shock. In this case, wage setting mechanisms play an
important role, especially the collective bargaining structure. During the crises, some of the
countries which managed to limit employment losses – as Germany, Thailand and South Korea –
displayed adjustments in real wages, or at least a slowdown of their growth. In general, country
which display more wage flexibility tend to present lower collective bargaining coverage and no
minimum wages, while a strongly centralized collective bargaining structure favors wage rigidity.
On the other hand, micro flexibility is the ability of the job market to reallocate workers in a way
that sustains growth. This must be achieved while minimizing the welfare loss of workers.
In this framework, Atkinson (1984) distinguishes two different kinds of flexibility.
First, the possibility of firms to adapt the number of workers to the economic situation, also known
as external flexibility. This capacity mainly depends on the degree of employment protection on
short and long term contracts, which regulates individual and collective dismissals. While the degree
of EPL varies widely across countries, the general tendency since the 1990s has been to reduce the
strictness of employment protection.
Second, an efficient reallocation of workers could be achieved without variations in the number of
employees, which is known as internal flexibility. This happens by adjusting the working time or by
reorganizing workers along the production process, which requires a labor force with broad and
high skills. The use of policies which enhance internal flexibility has been widespread during the
crises, in order to limit dismissals. Since 2008, the majority of countries have experienced important
reductions in the working hours and the share of part time jobs has increased significantly.
4
In order to limit the welfare cost of workers, countries also put in place diverse active and passive
labor market policies, which serve as stabilizers during time of crises.
Unemployment insurance benefits are fundamental in protecting unemployed from poverty, but
impact incentives of workers to go back to work and consequently labor market adjustments; hence,
they must be sustained by ALMPs aimed at facilitating the reintegration of the unemployed into the
labor market.
During the Great Recession different active labor market policies, unemployment benefits and
short-term work subsidies have been implemented, supported by important fiscal stimulus
packages.
An important amount of evidence has demonstrated that how countries combine labor market
institutions has an important impact on the response of unemployment to an economic crises.
Even if combinations differ widely across countries, four broad labor market regimes can be
identified1:
Table 1 - Flexibility models. Eichhorst et al. (2010)
Labor market policies
Employment protection (core)
Strong
Weak
Big
Continental countries
(Germany)
Flexicurity countries
(Denmark, Sweden)
Smal
Mediterranean countries
(Spain, Greece, Italy)
Anglo-Saxon countries
(US, UK)
Source: IZA
Traditionally, the most successful regimes in reacting to economic shocks have been the AngloSaxon countries and the Flexicurity countries. In particular, the results obtained by the Nordic
countries in “protecting their workers, not their jobs”, have promoted the “Flexicurity model” as
the exemplary strategy to follow.
However, there are some exceptions to this grouping. For example during the Great Recession
Germany’s labor market maintained an outstanding performance through the entire crisis, moving
toward the Flexicurity model.
In general, it is important to keep in mind that that this categorization is only indicative, and does
not necessarily imply good or bad performance of labor markets. The results obtained by countries
in reaction to the economic and financial downturn have been highly heterogenous, dictated also
by the availability of means and the state of the economy and of the labor market before the crisis.
1
Eichhorst et al. (2010) identified also groups of countries with similar patterns in terms of external and internal
flexibility. See Figure 3 and Figure 4 in the Appendix for more detail.
5
3 - Country case studies
In order to appreciate how and to what extent the different factors have contributed to define the
response of labor markets to the Global Financial Crises it is useful to focus on some of the most
meaningful national experiences.
This section will try to provide a global overview, starting with the United States, epicenter of the
crisis, and the European Union, which has been severely affected as well. It will be concluded by the
analysis of Asian labor markets, which can provide an interesting insight on how differences in
economic development can impact the response of labor markets.
3.1 - The United States
The US labor market is one of the most dynamic in the world. Exceptionally high rates of transition
from unemployment to employment and vice versa are accompanied by low structural and long
term unemployment. At the same time workers are entitled to low employment protection and
unemployment benefits, in the logic of incentivizing them to leave unemployment quickly.
This kind of flexibility can be labelled as “market flexibility” in that institutions don’t have a central
role in determining labor market outcomes. Albeit this system has been praised by international
scholars for several years before the crisis, it has not been able to live up to the expectations during
the Great Recession.
When the subprime crisis broke out in 2007, the US economy entered into the worst recession of
its recent history and this quickly destabilized the labor market.
At peak, unemployment rose to 10% while the share of the long-term unemployed – i.e. more than
6 months - tripled, from an average of 15% before the recession to 44% by April 2010. Moreover,
the labor force decreased dramatically in the years immediately after the crises. (Farooq & Kugler,
2013)
The rise in unemployment was largely driven by cyclical factors – namely a sharp decline in
aggregate demand. Consequently, the US response to the great recession mainly occurred under
the form of important macroeconomic stimulus, the bail out of big banks and accommodating
monetary policies by the Fed.
In 2009 and in 2010, two programs - the American Recovery and Reinvestment Act (ARRA) and the
Middle Class Act – introduced around 1400 billion USD under the form of government grants and
loans, targeted and broad tax credits to incentivize employers to hire (the Work Opportunity Tax
Credit and the HIRE act) and reductions of the payroll taxes of employees with income below
120.000 USD to stimulate private consumption.
Moreover, US government implemented several policies aimed at providing job search and training
assistance to displaced workers as well as programs aimed at filling the skill gap by establishing
partnership between training providers and employers. The latter was particularly effective in
reducing disadvantaged youth unemployment rates.
To support the large number of unemployed, and to mitigate the effects of long-term
unemployment, the maximum duration of unemployment insurance benefits was extended from
26 weeks up to 99 weeks for the states with the highest rates of unemployment. The program, called
the Emergency Unemployment Compensation, was a novelty for the US labor market, which
traditionally offers one of the lowest unemployment insurance globally. Besides prolonged benefits,
some programs where put in place to help the long term unemployed to be reintegrate in the labor
market, as regulars checks, skill assessment and job search counselling for the beneficiaries, as well
6
as self-employment assistance programs which allow unemployed to receive benefits also when
trying to set up their own business.
Part of the high unemployment rates can be attributed to the fact that US firms reacted to the
decline in output by reducing hours worked more than proportionally, resulting in an increase in
hourly productivity by 7.7%, instead than decreasing productivity per workers as majority of OECD
countries. A certain number of study attributes the extensive use of redundancies to a business
policy which sees layoffs as an ordinary tool in the profit maximizing kit of managers – rather than
a last resort practice. This vision could originate in the increased share of executive pay in stock
options or to the weak state of unions in the United States compared to other OECD members.
3.2 - The European Union
The unemployment response of European Union countries – which at the time included the United
Kingdom – to the financial and economic crises of 2007-2008 has been profoundly heterogeneous,
to the extent that some scholars refer to this phenomenon as “the Great Divergence”. Boeri et al.
(2016) estimate that the differences in average unemployment between the top and the bottom
quintile countries is 15 percentage points, while in the United States, a similar estimation made on
performance of individual states, yields to a difference of less than 5 percentage points.
The partial coordination of member states in many areas, from the economic field to that of the
labor market institutions, has certainly contributed to exacerbate heterogeneity of response in the
European Union. Boeri et al. (2016) show that the introduction of the euro reduced the scope for
macro stabilization policies at the national level, and attributed an even greater role to labor market
institutions, which are responsibility of the individual countries.
Most countries coupled macroeconomic stimulus packages with emergency employment policies to
stabilize employment and support unemployed workers. Differences in practices and policies
produced different employment performances in the recession and the recovery.
Three groups of countries can be identified according to different unemployment trends: countries
whose unemployment rate was barely affected - as Germany and the UK; countries which
performed better than the UE average - as Denmark, Sweden, Estonia and France; countries whose
labor market was heavily impacted by the crises, reporting higher unemployment rate than the
average – some example being Ireland, Italy, Spain and Greece. (Boeri et al. (2016))
3.2.1 - Germany
The most striking performance, and certainly the most studied, is that of the German labor market,
to the point that it has been appointed by many scholars an “Economic Miracle”.
German economy – which is highly export oriented - has been hard hit by the crisis. In 2009 GDP fell
by 4.7%, overtaking the losses of United states, France and the United Kingdom. Surprisingly,
however, the recession never turned into an employment decline. By the end of 2010,
unemployment rates where even lower than before the crises. In contrast, the reduction in working
hours has been greater than the average of European Union. (Rinne & Zimmermann, 2012)
The success of Germany’s labor market is highly institutionally driven. Starting from 2003, a number
of reforms - the “Hartz reforms” or “Agenda 2010” - addressed the major problems of the labor
market, which traditionally were considered to be high labor costs, high employment protection
and high long-term unemployment. The reforms, which changed the institutional setting of
Germany, reorganized unemployment benefits by introducing means-tested benefits and
7
stimulated labor supply by reducing long-term unemployment benefits and increasing monitoring
activities. Moreover, labor demand was stimulated by deregulating fixed-term contracts, agency
work, and part-time contracts. These changes improved the efficiency of the labor market and,
combined with a decline in unit labor cost thanks to the cooperative behavior of social partners, put
Germany on the right track when the Great Recession started.
Germany responded to the outbreak of the financial crisis by implementing various discrete policies
and exploiting existing automatic stabilizers, as working time accounts2 and tax and transfer
systems.
To cushion the impact on aggregate demand, the German government introduced two fiscal
stimulus packages in 2008, for a total investment of 82€ billions. These measures mainly included
tax deduction on healthcare, child benefits and payroll reductions, as well as “cash for clunkers
program”3 which was highly discussed and moderately efficient.
However, short-time work has been by far the most important tool, so much that it has been labeled
as “the German answer” to the crises. In response to the economic downturn, employees’ working
hours have been substantially reduced, compensated by government-sponsored subsidies.
Thanks to this working time flexibility, firms (especially those in vulnerable sectors as exports and
manufacturing) were able to retain their qualified workforce and followed a strategy of labor
hoarding: workforce was adapted to production needs by decreasing workers productivity instead
of firing.
Automatic stabilizers played an important role in sustaining those polices. For example, reductions
in working time accounts where used as an alternative to short-time work: many companies
adjusted at the margin first relying on working time accounts, until they were close to zero, and
then turned to short-time schemes.
3.2.2 - Denmark
Another national experience worthy of note is that of Denmark, pioneer of the Flexicurity model.
Even before the Great Recession, the model has attracted the attention of policy makers for its
ability to maintain very low rates of unemployment and a dynamic labor market. It consists in
combining low employment protection legislation with generous unemployment benefits, and an
extensive use of active labor market policies to counteract the possible disincentive effect of high
income support for the unemployed.
Nevertheless, Denmark was hard beat by the Great Recession, which, combined with a boom-bust
pattern in the years immediately before the crises, caused a drop in GDP by more than 5% between
2008 and 2009. Because of the sharp drop in demand, unemployment increased by 4 percentage
points between 2008 and 2010, almost twice the average increase of OECD countries. (Andersen,
2015)
However, this reaction seems reasonable in a dynamic labor market where flows in and out of
unemployment are high. Adjustments took place both through the number of working hours and
the number of employees, and by 2013 the flows into employment where restored to the pre-crisis
level. Also, thanks to the outstanding performance of Danish labor market before 2008,
employment was still higher than the European average.
2
Working time accounts ensure that if employees works fewer hours than contractually agreed, they receive the
full salary as a form of credit and the hours debt will be balanced once demand of labor improves.
3
A subsidy of 2500€ on the purchase of a new car in exchange for an at least 9-year-old car.
8
At the wake of the Great Recession, the policy focus has been on fiscal stimulus packages to restore
aggregate demand. Denmark implemented the most expansive fiscal policies of all OECD countries,
which was accompanied by powerful macroeconomic stabilizers, as generous unemployment
benefits.
Danish labor market policies are dynamic and adapted to the state of economy.
A highly contested reform programmed for 2012, shortened the maximal period of unemployment
insurance benefit from 4 to 2 years and increased the access requirements from 26 to 52 weeks
worked in previous three years, in the hope that in 2012 the business cycle would have been
restored to the pre-crisis conditions. When the prevision revealed to be too optimistic, and too
many unemployed risked to be ineligible for unemployment benefits, some ad-hoc measures were
quickly established to cushion the effect of the reform.
Dynamicity applies particularly in the design of active labor market policies. During the great
recession some reforms were implemented to make ALMPs more flexible and directly targeting
specific labor market needs, promoting individual job search rather than rigid employment
activation programs. More expensive programs, as class-room trainings were replaced by cheaper
initiatives as job training and the social assistance system has been rethought to encourage young
people to undertake a labor market relevant education. For example, unemployment benefits for
the under 30 were reduced in order to provide lower compensation than study grants.
3.2.3 - Spain
Not all European labor markets have been able to respond adequately to the crisis. In particular, the
countries which can be included in the so-called Mediterranean model – matching high employment
protection legislation with a moderate use of labor market policies – have recorded very high
unemployment rates which permanently damaged their labor markets.
In this framework, the experience of Spain is meaningful to understand how labor market
performance depends on a very country-specific mix of factors.
Spanish labor market has been always characterized by high unemployment rates and a “never
ending story” of reforms. In 1984, when unemployment was around 25%, a reform liberalized the
use of temporary contract. This promoted an extensive use of short-term contracts in all sectors,
and, despite successive reforms aimed at repairing the damage – for example by incentivizing open
ended contracts – the Spanish labor market became highly segmented.
The years immediately before the crisis have been characterized by above average economic growth
and unemployment decrease, mainly originating in the thriving housing and construction sector.
In 2007, the explosion of the speculative housing bubble curbed the decrease in unemployment and
in 2008, with the advent of the Global Financial Crises, unemployment rates started to increase
sharply and quickly, reaching a peak of more than 26% in 2013. The Spanish labor market, even
compared to other peripheral and southern European countries, has been one of the most affected
by the Great Recession, second only to Greece. (Malo, 2015)
The reasons of such severe impact can be find in the exposure to a vulnerable sector and the high
degree of labor market duality. Moreover, in 2012, a fiscal crisis followed by a high risk of default,
posed several constraint to the recovery.
Most labor market measures during the Great Recession have been driven by the urgency to
respond to the different stage of the crisis. Two stages of labor market policies can be recognized.
The first wave of measures aimed at funding the sudden increase in unemployment. A large slice of
the public budget was earmarked to finance unemployment insurance and improving access to
9
workers affected by temporary layoffs and short-time work scheme, and, under some conditions,
to self-employed workers. In 2009 a subsidy was introduced to cover those who exhausted their
right to unemployment benefits. The program was later renamed Plan PREPARA and consisted in a
means-tested benefit accompanied by labor market mediation and skills training.
Later on, in 2010, the bad fiscal position of Spain increased the concern for a possible default and
the government tightened budgets on passive policies. It implemented a reform aimed at improving
internal flexibility by addressing job market duality and changing collective bargaining structure. In
particular, it consisted in laws regulating redundancy costs and collective bargaining, in order to
improve wage flexibility and discourage firms from firing. During the entire recession, the lack of
understanding and collaboration between the government and social partners has always limited
the efficiency and success of the reforms, imposing important constraints on wage adjustment.
A minor attention was given to active labor market policies, mainly consisting in incentives to
promote open-ended contract – the so called “flat rate” - and self-employment.
At the end of the recession, the Spanish labor market was hit by the so called phenomenon of
hysteresis. The very high rates of unemployment, and the presence of highly unskilled unemployed
due to redundancies in temporary jobs, translated into a permanent increase of structural
unemployment at the end of the great recession.
3.3 - Asia and the Pacific
Consequences of the global financial crises have been more moderated in Asia and Australia
compared to western countries, both in term of economic growth and employment losses. Although
generalizing in such a wide and diverse region must be done with caution, an explanation can be
found in minor exposure of local banks to subprime assets, a sound financial system and a timely
and offsetting intervention by governments. However, because of the existing trade and investment
linkages between this region and western economies, the great recession also affected Asian
economic activity and, consequently, the labor market.
In many Asian countries, the major channel of transmission of the crisis was represented by exports,
which decreased sharply when aggregated demand collapsed in Europe and the United States.
Unemployment rates increased in many countries, particularly in export oriented sectors as
manufacturing. In 2009, unemployment increased by 6,7% in the Philippines and a record 73,3% in
Thailand. In Singapore, whose economy relies heavily on the financial sector, unemployed people
augmented by 28,7%. In contrast, unemployment decreased in Indonesia. (Huynh et al. , 2010)
As the crisis unfolded, the first reaction of many countries was to adopt expansionist monetary
policies aimed at restoring confidence in the financial system, especially in those countries which
are highly integrated into global financial markets.
Later on in 2008, when the first real effects of the financial crises started to materialize, reducing
volume of exports and growth, the focus of policymakers shifted to fiscal stimulus able to stabilize
aggregate demand.
According to their possibilities, almost all countries engaged in fiscal stimulus packages, including among others - China, India, Korea, Malaysia, Philippines, Thailand and Singapore. However the size
varied greatly, ranging from China, whose fiscal support accounted for 12% of the GDP, to those of
India, which allocated the equivalent of less than 1% of the GDP. (Huynh et al. , 2010)
Also the composition of the budget varied widely across countries, but the majority was generally
earmarked for public investment, especially in infrastructure and maintenance, aimed at creating
10
new jobs and indirectly stimulating private consumption. A minor but consistent part was allocated
for the expansion of poverty alleviation programs, included in country with limited or no fiscal space.
Some examples are unconditional and conditional cash transfers to poor and low-income families in China, Indonesia, Philippines, Thailand, and Singapore - schemes supporting child education and
health - especially in Indonesia and Philippines - subsidized utilities in Thailand and support for
housing in many economies.
Indeed, most Asian countries need to deal with some issue which are specific to developing
countries, and can undermine the efficiency of some initiatives. For example, due to the large
informal economy, reduction in corporate and income taxes has a limited effect in stimulating
demand and employment compared to developed countries. Also, the marginal propensity to invest
is quite low in many Asian counties, due to the high uncertainty about the future economic situation.
Fiscal measures which target credit constrained business can have a higher multiplier. Some
example of these policies include loans for credit-constrained small firms in India, Korea, Thailand,
and Vietnam and increased budget allocation for micro-finance in Indonesia.
In addition, part of the fiscal packages has financed policies to assist workers and employers. These
measures include job loss subsidies to assist unemployed workers in Vietnam and skills training for
retrenched workers in Malaysia and Thailand. China implemented job search assistance and
financial support for laid-off migrant workers which had to be relocated to the rural areas.
Korea relied more on subsidized employment while Singapore invested in training programs.
Although the response of many governments was unprecedented, social protections and support
for unemployed, are highly insufficient in many Asian countries. Because of this, many workers who
lose “formal wage employment” are left with no other alternatives than turning to informal
employment, which is a major obstacle to development for many Asian countries.
The approach to the crises was quite different for Japan and Australia, whose more developed labor
market institutions allowed them to rely highly on internal flexibility.
Japan was the Asian country that suffered most from the crisis. In 2009 GDP dropped by 6,3%
followed by a rise in unemployment of 5,6%. (Steinberg & Nakane, 2011)
However, the unemployment rate stabilized starting from august 2009. This was made possible by
a highly flexible labor market - allowing an extensive use of labor hoarding - and the exceptional
flexibility of wages. In Japan, over one-quarter of salaries is composed by bonuses and paid
overtime, the so-called non-regular wage, which allow companies to adjust wage downward during
adverse economic conditions. In this way, adjustments in the labor market have occurred mainly
through adjustment in wages rather than in employment, cushioning the impact of the great
recession on Japan’s labor market.
As many Western countries, Japan expanded the existing work subsidy program in support to
unemployed workers, by easing eligibility requirements and rising the subsidy rate and the duration.
The subsidy consists in a payment to the firms, with the prior consent of the employees, which is
generally used as a partial wage subsidy for employees on temporary leave.
Internal flexibility allowed Australia to emerge almost unscathed from the crisis. Thanks to a series
of reforms in the years before the crises, the Australian labor market was reorganized to enhance
internal flexibility. Compared to previous crises, these reforms allowed Australia to keep
unemployment rates low and stable through working time reductions and pay renegotiations.
Among countries of the Asia and Pacific regions, also Singapore and China engaged in flexibility
enhancing policies aimed at adjusting the labor force internally and minimizing dismissals.
11
4. Conclusion
This paper aims at providing an overview about how the labor markets of different countries all
around the world responded to the heavy economic impact of the Great Recession.
Starting by the employment reaction of the United States, the epicenter of the crisis, it explored
how European labor markets made use of very heterogenous tools to react to the Great Financial
Crises. Finally, since the crises has left its mark globally, the essay considered the impact on selected
Asian labor markets, whose economy is strongly linked with the US and European ones.
A large number of factors played a role in determining the response of labor markets, and for this
reason, the impact on employment has been highly heterogeneous in several countries, as well as
the recovery process.
First, economic and labor market conditions before the crisis matters. High growth rates, as in the
case of Asian countries, or low structural unemployment, as those of Denmark and the United
States, have contributed to alleviate the impact of the crisis on employment rates.
Moreover, the presence of vulnerable sectors in the economy – as the case of the construction
sector in Spain – increased the exposure of labor markets to the crisis.
Secondly, the availability of public resources for fiscal stimulus packages has allowed many countries
to cushion the impact of the crises on fiscal demand and incentivize employment. When this
possibility was not available, as in Spain during the European debt crises of 2012, translated in higher
unemployment rates and slower recovery.
Finally, the economic downturn resulted in organizational restructuring of labor market institutions,
and the different form of adjustment, which differed widely across country, had a fundamental role
in determining the response of employment and the recovery time. Those adjustments included
reduced working hours, deferment of wage increase and bonus payment, but also massive layoffs.
The general tendency in many countries has been to promote internal flexibility, rather than
external, and a relaxation of EPL together with extension of unemployment benefits.
Moreover, many countries made use of expensive fiscal policies to stabilize aggregate demand and
ALMPs to sustain reintegration in the job market and incentivize job retention, as subsidized
employment, job search assistance and skill assessment programs.
In conclusion, although some combinations of market institutions have led to better results than
others, the perfect recipe for reacting to the Great Recession has not been found yet, mainly
because the success of fiscal and labor market policies depends on a number of institutional,
economic and social factors that are specific to each country. Moreover, while relying on internal
flexibility is certainly a way to avoid the much huge social an economic cost of unemployment, it
also promotes labor market duality and let most disadvantaged workers to carry most of the burden
coming from labor market adjustments.
12
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6. Appendix
Figure 1 - Year-on-year percentage change in employment in G20, 2008–2010. Eichhorst et al. (2010)
Panel A - G20 as a group
Panel B – By country
*India and Saudi Arabia are not taken into account because information is not available. EU27 as group is included in the calculations. Note: Growth
rates are year-on-year changes. Employment data for Argentina, Brazil and China correspond to urban areas. Data are seasonally adjusted.
Source: IILS estimates based on Eurostat database; ILO, Laborsta database and OECD.
Figure 2 -Variation of real GDP and total employment in the G20 and EU countries 2007 – 2010. Eichorst et al. (2010)
Panel A - Advanced G20 and EU countries
Panel B -Emerging G20 and EU countries
Note: The division between Advanced and Emerging G20 countries is based on a median calculated on per capita GDP for the period. Changes in GDP
and employment are growth rates measured from peak to trough (where a trough has not yet been attained, the latest available information is
used). The comparison across countries in the same group is done relative to the group’s median.
Source: IILS estimates based on: OECD, Economic Outlook No. 86; Eurostat database; ILO, Laborsta database; and IMF, IFS database
Figure 3 - Cluster Tree external and wage flexibility, 2003. Eichhorst et al. (2010)
Source: IZA
Figure 4 - Cluster Tree overall flexibility, 2003. Eichhorst et al. (2010)
Source: IZA
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