Extensive versus intensive margin over the business cycle: New evidence for Germany and the United States

This article analyses the relevance of the extensive and the intensive margin of labour adjustment over the business cycle in Germany and in the United States. Previous research has found that, firstly, the extensive margin dominates and that, secondly, the relative relevance of the two margins is of similar magnitude in both countries. This is in contrast with results from the research on the German employment performance in the Great Recession which attributed part of the employment success to the widespread use of instruments of internal flexibility. Our results confirm that generally, the extensive margin is still the dominant margin of labour adjustment over the business cycle in both countries. While our reassessment shows that the relative importance of the extensive and intensive margin for the United States is stable over time, in Germany it is quite volatile over time. In general the intensive margin in Germany is more important than in the United States. However, its actual size depends crucially on the choice of the smoothing parameter of the Hodrick-Prescott Filter. In the Great Recession and the subsequent time period the intensive margin is dominant in Germany independent of the choice of the smoothing parameter.