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 5. References Andersen, T. 2015. “A flexicurity labor market during recession”. IZA World of Labor 2015: 173 doi: 10.15185/izawol.173 Employment and the Role of Labour Market Institutions". IZA Discussion Papers 5320, Institute of Labor Economics (IZA). Andersen, T. & Svarer, M. 2012. "Active labour market policies in a recession". 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IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 1(1), pages 1-21, December. Steinberg, C. & Nakane, M. 2011. "To Fire or to Hoard? Explaining Japan’s Labor Market Response in the Great Recession". IMF Working Papers 11/15, International Monetary Fund. Verick, S. & Islam, I. 2010. "The Great Recession of 2008-2009: Causes, Consequences and Policy Responses". IZA Discussion Papers 4934, Institute of Labor Economics (IZA) 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 15
