The most interesting bits of the International Monetary Fund’s World Economic Outlook are often contained in the underlying research and not in the economic forecasts. In this edition, Fund economists have been examining the state of global labour markets and noted, as I did in a previous post, the strange patterns in global employment over the course of this recession.
Take a moment to look at this chart. The blue blobs show the relationship between lost output and unemployment in previous cycles and the red blobs show what has happened this time. The red blobs dominating the left of the chart show this recession is much worse around the world than other downturns in terms of lost output. But unemployment rises have been similar or smaller than in other recessions. The US is an exception with a much more rapid increase in unemployment and a modest decline in output.
Obviously this means that productivity – output per hour worked – has gone through the floor in many countries, while it has not fallen in the US. The comparison between the US and Germany is particularly stark, showing Germany has been hoarding labour much more than the US and much more than in previous recessions. The US is the polar opposite. “US employment losses during the current cycle have been significantly larger than for the 2001 recession, or any previous recession,” the Fund notes.
What message is the IMF sending from these remarkable differences? Well it is to be afraid about losing your job, whether you are in a country like Germany or in the US.
The German and wider European case is obvious. With such a large decline in labour productivity, companies will be able to increase production for a long time without hiring and if a recovery does not emerge, a surge in unemployment is still on the cards.
But the news is not much better for the US, where the IMF says low labour market protection is unlikely to result in a return to job creation soon. Because the US has also suffered a housing bust and systemic financial crises, the Fund says, “such a combination generally leads to large output drops and significantly delays recovery, suggesting a slow and tepid pickup in job creation”.
This labour market puzzle has a long way to go yet. If European countries can get away without a huge surge in unemployment, they will become much more aggressive defenders of their more rigid labour markets, saying this downturn proved rigidities were, in fact, safeguards against the evils of unemployment, particularly where wage restraint has enabled companies to preserve jobs.