More signs of stabilisation

Krishna, Ralph and I have all been noting the remarkable differences in labour market performance between Europe and the US. In brief, Europe has seen larger falls in output but smaller falls in employment. The result is that the recession doesn’t feel so bad on the old continent, but labour productivity has fallen through the floor. It is hard to know which is better.

There is more evidence of this trend today from the UK, a labour market normally thought more similar to that in the US than in continental Europe. Unemployment appears, more or less, to have stopped rising, as this chart from the Office for National Statistics shows, but the UK has continued in recession, that is, if you believe the official figures.

Since unemployment is supposed to be a lagging indicator of the economy, what can explain the differences between the US and Europe (excluding Spain and Ireland)?

Output is being measured too pessimistically in Europe and too optimistically in the US. This is true historically;European labour markets have become more flexible with workers accepting real pay cuts and shorter-time working in exchange for fewer redundancies. Unlikely, because similar trends have occurred in the US (see data comparing countries’ employment responses);European companies are hoarding labour temporarily and are just about to start a horrible programme of redundancies. Surveys of companies do not suggest this is true, though it could be a possibility;The recession has been unusual, coming at a time of European corporate strength. Low interest rates and strong cash flows have allowed labour hoarding which is impossible when companies go bankrupt. This seems a good explanation in Europe, since bankruptcies of large companies have been small, but does not explain the trans-Atlantic difference;US employers treat labour as the primary risk-takers in companies, not equity holders, so they use a downturn as an opportunity to cut workforces. In contrast, European companies have allowed equity to take more of the burden of the recession. This is a plausible hypothesis, but that is all it is so far;European companies have learnt that rehiring workers when a recovery comes along is difficult so have been more willing to accept temporary reductions in productivity. Again plausible, and needs more research.

We will not have the answers to these questions for many years, but I think the differences in labour market performance across the Atlantic is probably the most interesting question arising out of this recession (as opposed to the financial crisis).

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