Sidebar

A Closer Look at G-7 Labor Patterns during the 2007-2009 Recession

In the two decades prior to the 2007-09 recession, the U.S. had one of the lowest unemployment rates among the world's major industrialized countries. As of the first quarter of 2007, for example, the U.S. unemployment rate stood at 4.5 percent, roughly half that of France and Germany. Only Japan's unemployment rate was lower among the Group of 7 (G-7) countries.1 See Figure 1.

During the Great Recession, the U.S. went from having one of the lowest unemployment rates to one of the highest. By the end of the recession, the U.S. unemployment rate stood close to 10 percent, roughly on par with France—a country whose unemployment rate stood at 9 percent prior to the recession! Even more shocking to seasoned observers of world labor markets, the unemployment rate in Germany actually declined through most of the recession.

Figure 1

Unemployment Rate in G-7 Countries

2007:Q1 - 2010:Q3

SOURCE: Statistics Canada, OECD, Bureau of Labor Statistics/Haver Analytics.

Why has the unemployment response to the recession been so different among G-7 countries? One explanation may simply be that the strength of recessionary forces varied across each country. If true, then one might expect a strong relationship between the change in the unemployment rate and the change in GDP across countries. If a country experienced only a small decline in GDP, then one would expect the change in unemployment to be correspondingly small in that country, and vice versa. In fact, this appears not to be the case at all.

Figure 2

The 2007-09 Recession: Impact on Real GDP and Unemployment in G-7 Countries

SOURCES: Data come from OECD/Haver Analytics. Peak and trough dates for each country are from the National Bureau of Economic Research (for the U.S.) or from the Organisation for Economic Co-operation and Development (for the remaining G-7 countries).

Consider Figure 2, which plots the decline in GDP from peak to trough against the increase in the unemployment rate for each G-7 country. There appears to be little, if any, correlation between changes in GDP and unemployment. Compared with other G-7 countries, the U.S. experienced a relatively small decline in GDP during this recession—the third smallest decline in GDP after France and Canada. Of all G-7 countries, however, the U.S. experienced the largest increase in its unemployment rate.

Figure 3

Civilian Employment in G-7 Countries

2007:Q1 - 2010:Q4

SOURCES: Statistics Canada, OECD, Bureau of Labor Statistics/Haver Analytics.

The level of employment in six of the seven G-7 countries over the course of the recession followed a broadly similar pattern. Figure 3 shows quarterly civilian employment for G-7 countries, with the series normalized to 100 in the first quarter of 2007. As the picture shows, the U.S. appears to be the outlier here, shedding a significantly larger percentage of employees than the rest of the G-7 countries. Canada, Germany and France actually saw their employment levels rise during the recession compared with the first quarter of 2007.

Employment normally contracts during a recession. Moreover, real GDP usually declines proportionately more than employment. The implication is that labor productivity—measured as output per worker—tends to decline during a recession. This commonly observed behavior was evident among all the G-7 economies during the past recession, with the notable exception of the U.S.; see Figure 4.

Figure 4

Labor Productivity (GDP per Worker) for G-7 Countries

2007:Q1 - 2010:Q3

SOURCE: G10+ Database/Haver Select.

Figure 4 plots labor productivity (GDP per employed worker), normalized to 100 in the first quarter of 2007. As the figure illustrates, U.S. labor productivity rose throughout the recession and continues to rise rapidly. Countries for which the impact of the recession on the unemployment rate was relatively small, such as Germany and Japan, saw output per worker decline significantly. As of the third quarter of 2010, only Canada, France and Japan had essentially returned to pre-recession productivity levels.
As usual, there are several ways to interpret the data. First, it may be possible that the productivity of labor rose in the U.S. and that this event allowed U.S. firms to economize on labor. It is hard, however, to imagine a recession being the consequence of some random force that increased economy-wide labor productivity.

An alternative explanation is that low-skilled workers are affected disproportionately during a typical recession: They are the first ones to be let go. If this is the case, then the average quality of employed workers tends to rise during a recession. Perhaps this accounts for the increase in measured average labor productivity in the U.S. If this hypothesis is correct, then to explain the data, one must be willing to entertain the idea that business managers are somehow more willing or able to lay off lower-skilled workers (or workers in general) in the U.S. relative to other G-7 economies.

Figure 5

Overall Strictness of Employment Protection OECD Index, 2008

SOURCE: OECD Indicators of Employment Protection.
NOTE: The index ranges from 0 to 6, with 0 representing the least-strict and 6 representing the most-strict employment protection.

In fact, there is some evidence to suggest that cross-country differences in regulatory environments permit varying degrees of labor market flexibility. Figure 5, for example, compares the strictness of employment protection for G-7 countries according to a measure constructed by the Organisation for Economic Co-operation and Development (OECD).2 The index is a weighted sum of a set of employment protection indicators that measure the rules and costs regarding the firing of workers (individuals and groups) and the use of temporary contracts. As can be seen in the figure, employment protection varies quite a bit among G-7 countries, with the U.S. having the least-strict employment protection.

For most of the past 30 years, the U.S. labor market has outperformed most others, especially in terms of low unemployment rates. This relative success has been attributed, at least in part, to the alleged flexibility in the U.S. labor market. In particular, high unemployment in European countries is frequently linked to laws that make it difficult to shed workers and/or hire temporary workers. Less flexibility means less profitability for firms and, hence, less incentive to hire workers.

It is perfectly natural, then, to expect employment and unemployment to react more violently to cyclical forces in a flexible labor market. And, indeed, this appears to have been the case during the recent recession.

Endnotes

1. The G-7 countries are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. [back to text]

2. For more details on the OECD indicators of employment protection, see OECD (2011) and Venn. [back to text]

 

References

DiCecio, Riccardo. "Cross-Country Productivity Growth." Federal Reserve Bank of St. Louis International Economic Trends, November 2005. See http://research.stlouisfed.org/publications/iet/20051101/cover.pdf

Organisation for Economic Co-operation and Develop-ment. "OECD Indicators of Employment Protection." Accessed on March 9, 2011. See www.oecd.org/employment/protection

Organisation for Economic Co-operation and Development. OECD Employment Outlook 2010: Moving Beyond the Jobs Crisis. Paris: OECD Publishing, 2010.

Organisation for Economic Co-operation and Development. OECD Employment Outlook 2009: Tackling the Jobs Crisis. Paris: OECD Publishing, 2009.

Organisation for Economic Co-operation and Development. "Employment Protection: The Costs and Benefits of Greater Job Security." OECD Policy Brief, September 2004. See www.oecd.org/dataoecd/6/32/33736760.pdfarrow

Venn, Danielle. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators." Working Paper No. 89, OECD Social, Employment and Migration, 2009. See www.oecd.org/dataoecd/36/9/43116624.pdfarrow