Should we believe the German labour-market miracle?

Jobs and the lack of them are top of the agenda for policymakers and increasingly groups of protestors gathered in the financial districts of New York, London, Wellington, Christchurch and elsewhere. Unemployment in many of these countries is in danger of reaching 10%. In Germany, however, unemployment is below 7%. Some hail it as a miracle. This column, from VoxEU.org, finds a scientific – and far less inspiring – explanation.

In recent research (Burda and Hunt 2011), we show that one unnoticed explanation can explain a significant component of the reputed economic miracle. In the export-driven expansion of 2005–07, firms hired significantly less than that expected, given the extent warranted by GDP and wages. As evidenced by data on firm expectations and articles in the business press, firms had unusually low confidence the boom would last. We show that the missing employment increase in the 2005–07 boom was equivalent to 40% of the missing employment decline in 2008–09, and that more than half of the missing employment increase was attributable to firms’ pessimistic expectations. Firms hesitated to hire in the boom, as they feared it would not last, and when eventually the recession they feared arrived, they had less need to fire than in previous recessions.

So if you don't hire people, you don't have to fire them.