Working Paper: NBER ID: w4548
Authors: Susan N. Houseman; Katharine G. Abraham
Abstract: Like most Western European countries, Germany stringently regulates dismissals and layoffs. Critics contend that this regulation raises the costs of employment adjustment and hence impedes employers' ability to respond to fluctuations in demand. Other German labor policies, however, most especially the availability of unemployment insurance benefits for those on short time, facilitate the adjustment of average hours per worker in lieu of layoffs. Building on earlier work, we compare the adjustment of employment, hours and inventories to demand shocks in the German and U.S. manufacturing sectors. We find that, in the short run, whereas U.S. employers rely principally on the adjustment of employment levels to respond to demand shocks, German employers rely principally on the adjustment of average hours per worker. The adjustment of overall labor input is generally similar in the two countries. Short-time work makes a very important contribution to short-run hours adjustment in Germany. We find little evidence that inventories help to buffer demand fluctuations in either country. Our findings suggest that, given appropriate supporting institutions, strong worker job security can be compatible with employers' need for flexibility in staffing levels.
Keywords: Labor Adjustment; Institutional Structures; Germany; United States
JEL Codes: J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. employers adjust employment levels in response to demand shocks (J23) | Employment adjustment practices in the U.S. (J65) |
| German employers adjust average hours per worker in response to demand shocks (J29) | Employment adjustment practices in Germany (J53) |
| Strong job security laws in Germany (J53) | Employment adjustment practices in Germany (J53) |
| Availability of unemployment insurance benefits for short-time work (J65) | Average hours worked in Germany (J29) |
| Institutional differences (D02) | Overall labor input adjustment in both countries (F16) |
| Labor adjustment practices (J68) | Inventory buffering in both countries (F10) |
| Strong worker job security (J28) | Labor market responses to economic fluctuations (E24) |