Tuesday, November 17, 2009

Labour market rigidities...

... can be good for you.

Krugman has a piece on the advantages of less flexible labour markets, based on the observation that unemployment has grown less in Germany than in the United States. This is largely because of government subsidies and corporatist agreements to share the reduced amount of available work evenly across the existing workforce, rather than firing some workers and keeping the rest at normal speed.

Would be nice to see some comparative data across OECD countries, to see if there is any prima facie connection between levels of employment protection legislation (EPL) and changes in unemployment in the current crisis. Hard to get a handle on this empirically, because many countries with high EPL also have dualistic labour markets, in which the core workforce is protected but the 'outsiders' can be more or less sacked at will - this is certainly the case in Spain which has had a brutal contraction in the labour market. It was my understanding that Hartz IV had created such a situation in Germany. Maybe not.

Another disconfirming piece of evidence: unemployment in the UK has not spiked as much as one would expect given the big decline in GDP (we're way short of 10%, so much better than in the US). Difficult to know what to make of this - perhaps recent immigrants going home instead of signing on?

Anyway, Krugman may have a point (he usually does), and I might have to revise my enthusiasm for 'flexicurity'. It sounded too good to be true anyway...