The German Labor Market in the Great Recession: Lessons for Other Countries

The performance of the German labor market during the crisis that began in 2008 stands out among developed countries. During the crisis, employment was preserved to a much larger extent than in other countries, notably when compared with the scale of the downturn; this outcome is now frequently described as the “German miracle.” The increase in unemployment in the great recession—the global economic decline that started in 2008 and the effects of which continue—differed substantially among countries, with Germany occupying one end of the spectrum (almost no increase) and the US (and notably Spain) standing at the other end (with a larger increase than many observers had expected). Furthermore, while the German economy recovered forcefully from the recession, and unemployment has fallen below its estimated long-run structural rate (i.e., the unemployment rate that is unaffected by cyclical variations), the US labor market is plagued by an unusual stickiness of long-term unemployment. It is as if labor market flexibility, for example the relatively light employment protection legislation that eases hiring and firing, does not pay off in the US in terms of growth, while Germany is not punished for having frozen its employment structure by avoiding layoffs during the crisis. Explaining the driving factors behind these differences is essential not only for understanding the German labor market miracle but also for providing lessons for other countries.