Labor market policies GFC - Camilla FIORINA

Labor Market Policies in Response
to the Global Financial Crisis
A Comparative Analysis
Camilla FIORINA
M2 IMPF – 2019/2020

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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 7
3.2.1 - Germany 7
3.2.2 - Denmark 8
3.2.3 - Spain 9
3.3 - Asia and the Pacific 10
4. CONCLUSION 12
5. REFERENCES 13
6. APPENDIX 14

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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.

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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.

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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
identified
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:
Table 1 - Flexibility models. Eichhorst et al. (2010)
Employment protection (core)
Strong
Weak
Labor market policies
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 Anglo-
Saxon 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.
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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.