The German labor market during the Great Recession: Shocks and institutions

This paper analyzes Germany's unusual labor market experience during the Great Recession. We estimate a general equilibrium model with a detailed labor market block for post-unification Germany. This allows us to disentangle the role of institutions (short-time work, government spending rules) and shocks (aggregate, labor market, and policy shocks) and to perform counterfactual exercises. We identify positive labor market performance shocks (likely caused by labor market reforms) as the key driver for the “German labor market miracle” during the Great Recession.     

The rise of part-time employment in the great recession: Its causes and macroeconomic effects

During the Great Recession, the U.S. economy witnessed a substantial rise in part-time employment for a sustained period. We extend the New Keynesian unemployment model by Galí et al. (2012) to allow substitutions between full-time and part-time labor, and estimate the model’s parameters by using the Bayesian method. In our model, households and firms can optimally allocate full-time and part-time labor, and disturbances exist in part-time labor supply (household disutility from part-time labor) and part-time labor demand (firms’ efficiency to use part-time labor). As for the Great Recession, the initial increase in part-time employment at the outset of the financial crisis is mostly explained by the rise of the risk premia; the persistently high level of part-time employment in the later period is mainly explained by an exogenous increase in part-time labor supply. A part-time labor supply shock also explains a significant portion of slow recovery in the gross wage during the recession, as the shock lowers the part-time wage and the proportion of full-time workers in total employment. Notably, the results from our model suggest that though the transition from full-time to part-time jobs contributed to mitigating the sharp contraction in total employment and labor force during the Great Recession, it played only a limited role in relieving recessionary pressure.     

Counteracting Unemployment in Crises: Non‐Linear Effects of Short‐Time Work Policy*

Short‐time work (STW) is a labor‐market policy that subsidizes working‐time reductions among firms in financial difficulty to prevent lay‐offs. Many OECD countries have used this policy in the Great Recession. In this paper, we show that the effects of STW are strongly time‐dependent and non‐linear over the business cycle. Discretionary STW policy might save up to 0.87 jobs per short‐time worker in deep economic crises. In expansions, the effects are smaller and might turn negative. We disentangle discretionary STW from automatic stabilization in German data using smooth‐transition vector autoregressions.     

Macroeconomic Policies for Slovenia in the “Great Recession”

The paper analyzes the effects of different reactions of fiscal (and to some extent monetary) policies to the Great Recession in Slovenia. We use the model SLOPOL8.1, an econometric model of the Slovenian economy, to simulate the effects of the global crisis under the assumption of no-policy reactions, i.e. assuming that macroeconomic policies are conducted without attempting to deal with the effects of the recession. Moreover, we investigate whether (and if so, how) fiscal policy can reduce or even annihilate the macroeconomic effects of the recession. It turns out that in order to achieve reasonable rates of growth and of unemployment, a highly expansionary design of fiscal policies is required, which is neither realistic nor sustainable. There are strong trade-offs between countercyclical fiscal policies and the requirements of fiscal solvency. Acceptable fiscal policies are mildly countercyclical and are not able to shelter the Slovenian economy from the negative effects of a slump like that occurring during the Great Recession.     

Unemployment persistence in OECD countries after the Great Recession

The 2008 economic downturn in the United States resulted in a wave of contractionary effects across many OECD countries. This paper investigates the pattern of the unemployment persistence in the United States and other 28 OECD countries before and after the Great Recession. To detect possible changes in the pattern of unemployment persistence, we employ a mean bias-corrected estimation of the persistence parameter with a rolling window of five years. In addition, we estimate the most likely date of change in the trend function of unemployment to test whether there was any significant change in the pattern of unemployment persistence after the Great Recession. We find significant evidence of a structural break and hysteresis in unemployment rates, with a persistence parameter close to unity, across the United States and other 28 OECD countries. Besides, bootstrap permutation tests show that all half-lives and impulse response functions have significantly changed after the Great Recession. Therefore, our findings call for structural reforms aimed at improving labor market performance, to prevent upward shifts in unemployment across OECD countries from becoming permanent.     

The Great Recession and charitable giving

We examine the impact of the Great Recession on charitable giving. Using the Panel Study of Income Dynamics, we estimate a variety of specifications and find sharp declines in overall donative behaviour that is not accounted for by shocks to income or wealth. These results suggest that overall attitudes towards giving changed over this time period.     

It ain’t over till it’s over: A global perspective on the Great Moderation-Great Recession interconnection

A large-scale Factor-Augmented Vector Autoregressive (FAVAR) model of the global economy is used to investigate the determinants of the Great Moderation and the transition to the Great Recession (1986–2010). Beside the global-economy perspective, the model presents the novel feature of a broad range of included financial variables and risk factor measures. The results point to various mechanisms related to the global monetary policy stance (Great Deviation), financial institutions’ risk-taking behaviour (Great Leveraging) and global imbalances (savings glut), determining aggregate fluctuations. Finally, an out-of-sample forecasting exercise provides evidence against the ‘end of the Great Moderation’ view, showing that the timing, though not the dimension of the Great Recession episode (2008–2010), was predictable on the basis of the same macroeconomic mechanisms at work over the two previous decades.     

The 2008/09 Economic Crisis: The Impact on Psychological Well-Being in the USA

The 2008/09 economic crisis has been the worst crisis of capitalism since the Great Depression. The causes and implications of the so-called “Great Recession” have been widely documented, but the effects of the crisis on psychological well-being have only received limited attention. Using state-level data, this paper aims to assess empirically the impact of the 2008/09 crisis on several indicators of mental health in the USA. The results indicate that unemployment and income levels have a significant and detrimental impact on mental health. This implies that social protection systems—and in particular labor market programs—play a paramount role in reducing the adverse impact of the crisis on mental health.     

The heterogeneous effects of labor informality on VAT revenues: Evidence on a developed country

The value-added tax is spread in many countries primarily because it allows rising public revenues, but its revenue performance can be undermined in the presence of informality. We document the existence of heterogeneous effects of labor informality on VAT collection in a developed country such as Italy. By using novel regional administrative data on VAT revenues, we find that labor informality produces negative effects on total VAT collection, including VAT on production and consumption, and positive effects on VAT revenues from consumption only. We also find that the consequences of labor informality on VAT collection depend on the size of informality, by approximating an-inverted U-relation. As for Italy, we explain such heterogeneous effects with the presence of regional differences in labor market conditions. We also document that labor informality has heterogeneous effects on VAT collection when considering specific productive sectors, and the cyclical consequences of the Great Recession.     

The Great Recession,Household Income,and Children's Test Scores

Economic downturns may have important implications for the educational attainment and human capital accumulation of children. We examine how income losses during the Great Recession were associated with children's educational performance in Ireland, one of the countries most severely affected by the global financial crisis. Using longitudinal data from a nationally representative child cohort study, collected before and after the recession at ages 9 and 13 years, we estimate panel models to examine the impact of income changes on standardized tests. We explore both objective and subjective measures of recession impact, and investigate non-linearities and effect heterogeneity using quantile regression. While income is strongly associated with educational performance overall, there is little evidence of a short-run negative impact of income shocks during the Great Recession on children's test scores.     

Business cycle fluctuations and household saving in OECD countries: A panel data analysis

We investigate the cyclicality of the household saving to household disposable income ratio for a panel of 16 OECD countries over the period 1969–2012. We find evidence that the household saving ratio is countercyclical. We empirically investigate whether the determinants of saving suggested by a standard buffer stock model of saving can explain this finding. The three main determinants of household saving implied by such a model (i.e., unemployment risk, household wealth and credit constraints) have a significant impact on the household saving ratio while their combined effect completely offsets its countercyclicality. The saving regression results are robust to potential endogeneity of the regressors, to making use of a reduced sample size that leaves out the period of the Great Recession, and to the one-by-one addition of variables suggested by alternative theories that also predict a countercyclical saving ratio.     

The Great Recession and Racial Inequality: Evidence from Measures of Economic Well-Being

Abstract:

The Great Recession had a tremendous impact on low-income Americans, in particular Black and Latino Americans. The losses in terms of employment and earnings are matched only by the losses in terms of real wealth. In many ways, however, these losses are merely a continuation of trends that have been unfolding for more than two decades. We examine the changes in overall economic well-being and inequality, as well as changes in racial economic inequality during and since the Great Recession. We find that the Levy Institute Measure of Economic Well-Being inequality between White and Black households decreased during the Great Recession but since 2010, racial inequality in terms of LIMEW has increased. We find that changes in base income, taxes, and income from non-home wealth during the Great Recession produced declines in overall inequality, while only taxes reduced between-group racial inequality.     

Potential output and inflation dynamics after the Great Recession

Ever since the end of the Great Recession, the US economy has experienced a period of mild inflation, which contradicts with the output–inflation relationship depicted by a traditional Phillips curve. This paper examines how the permanent output loss during the Great Recession has affected the ability of the Phillips curve to explain US inflation dynamics. We find great similarity among several established trend–cycle decomposition methods: potential output declined substantially after the Great Recession. Due to the fact that a lower level of potential output implies a lesser deflationary pressure, we then show that the Phillips curve does predict a period of mild inflation. This finding is largely consistent with the observed data.     

Predicting US county economic resilience from industry input-output accounts

Resilience is defined as a system’s ability to initially resist and then recover from a shock. Here we apply this concept to examine the performance of U.S. counties during the Great Recession. The response of local economies to manmade and natural shocks is hypothesized to depend on the centrality of local industries within the economy, or how well connected they are to the other industries. We first calculate a centrality value for each industry using the national Input-Output accounts. We then ‘step down’ these values to the county level using industry employment data. We then test empirically whether local economies containing more centralized industries were more resilient, using a resilience measure that compares the local employment rebound and decline during the Great Recession. Our results suggest that measures of economic centrality adopted from the study of complex networks provide new insights when applied to the fields of regional science and spatial analysis, and economic growth more generally.     

The business cycle,labor market transitions by age,and the great recession

Using matched monthly CPS data, this article studies differences in labour force transitions across age groups focusing on periods prior to and after the start of the Great Recession. Monthly transitions between employment, unemployment, and nonparticipation of 25–55-year-old males are examined from 1996 through 2013. Prior to the Great Recession (1996–2007), younger groups of workers are more likely to move from employment to unemployment and face an increased risk beyond that of other workers of making this transition as the economy worsens; however, this differential responsiveness no longer appears after the start of the Great Recession. Before and after the start of the Great Recession, younger groups of workers are more likely to move from unemployment to employment; however, there is no extra responsiveness among younger workers to the business cycle. Transitions into and out of the labour force nuance these findings; however, there is no evidence of differential responsiveness among younger workers since the start of the Great Recession. These findings challenge interpretation of the movements of unemployment rates by age group over the business cycle as being driven by differential hiring and firing particularly since the start of the Great Recession.     

Distant but Close in Sight: Firm-level Evidence on French–German Productivity Gaps in Manufacturing

We study productivity-level distributions of manufacturing firms in France and Germany, and how these distributions evolved across the Great Recession. We show the presence of a systematic productivity advantage of German firms over French ones in the decade 2003–2013, but the gap has narrowed down after the Great Recession. Convergence is explained by the better growth performance of French firms in the post-recession period, especially of those located in the top percentiles of the productivity distribution. We also highlight the role of sectoral growth, firm size, and export intensity in explaining the above convergence. In contrast, the contribution of allocative efficiency was small.     

UP IN STEM,DOWN IN BUSINESS: CHANGING COLLEGE MAJOR DECISIONS WITH THE GREAT RECESSION

We use the American Community Survey (ACS) to investigate the extent to which college major decisions were affected during and after the Great Recession with special attention to business and science, technology, engineering, and mathematics (STEM) fields, as well as the heterogeneity across demographic groups. Several conclusions are reached. First, the Great Recession increased the frequency of STEM majors but decreased the frequency of business majors. Second, the increase for STEM fields spreads across several detailed STEM majors, while the decrease in business majors is especially concentrated among finance and management. Third, we find strong heterogeneous effects of the Great Recession by gender and race/ethnicity. (JEL I20, J24)     

Employment to output elasticities and reforms towards flexicurity: Evidence from OECD countries

Labor market reforms in the direction of “flexicurity” have been widely endorsed as a means to increase an economy's ability to adjust to negative shocks while offering adequate social safety nets. This paper empirically examines how such reforms influence employment's responsiveness to output fluctuations (employment–output elasticity). To address this question, we employ a single equation error correction model with policy interactions on a panel of OECD countries, which also incorporates the period of the Great Recession, and distinguish between passive and active labor market policy types. Flexicurity is represented by three policy measures: unemployment benefit generosity, the flexibility of hiring and firing rules, and spending on active labor market policies. We find that the effects of any single policy change are shaped by the broader existing policy mix within which it takes place. A hypothetical flexicurity reform towards the policy mix of Denmark, a well-known example of the flexicurity regime, is found to increase or leave unchanged countries' short-run employment–output elasticities, depending on the initial policy mix. These results are robust to accounting for a large set of additional labor market institutions.     

International Integration,Trade, and the Great Recession

In the wake of the Great Recession, almost all countries suffered a severe and synchronized trade collapse unlike any seen since the Great Depression. To the extent that economic integration fosters trade among countries, this paper examines the role that international integration played in moderating the negative shock caused by the Great Recession on trade. The methodology adopted is a modified gravity model in which we control for the Great Recession, different forms of integration, as well as the interaction between integration and the recession. Measuring integration in three different ways, the findings show that countries that were more integrated fared better in trade – the extent of trade collapse was milder – than less integrated countries. Specifically, Regional Trade Agreement, as a form of trade integration, had a positive and robust effect on trade during the Great Recession. This positive effect is also robust across regions and countries around the world. In a nutshell, countries that are into some form of trade agreements are better-positioned to absorb negative demand-side shocks caused by economic recessions than similar countries without such agreements.     

Labor market rigidity and productivity growth in a model of innovation-driven growth

Empirical studies investigating the relationship between productivity performance and labor market rigidity have generated a negative result. In this paper we try to provide a theoretical explanation for this empirical result. In doing so, we construct a no-shirking model of innovation-based growth and investigate the steady-state impact of a set of active labor market policies aimed at reducing labor market rigidity and knowledge mismatch generated by innovations. We find that, while enhancing job finding activity definitively improves the equilibrium growth-unemployment mix of the economy, reducing the knowledge mismatch of innovation through active measures is less effective in reducing the equilibrium unemployment and improving growth.