Stabilizing the Macroeconomy with Labor Market Policies

The use of active labor market policies was critical during the global financial crisis of 2008. While the U.S. economy underwent a slow recovery despite the most aggressive fiscal and monetary policies pursued since the Great Depression, by contrast the German economy, having implemented active labor market policies such as the Working Time Account, experienced a prompt recovery process. To begin with, we focus on the cyclicality of the share of labor income, that is, the moving correlation between the GDP growth rate and the share of labor income, as a measure of stability in the labor market. If the labor income share exhibits counter-cyclical movement in the business cycle, we can interpret that the labor market is stable. On the other hand, if it shows a procyclical movement, it implies that some stabilizing policy measures are required. We found that in Korea, the share of labor income is mostly countercyclical and the share of labor income in the manufacturing sector was procyclical in the period between the East Asian economic crisis and the global financial crisis. In addition, the counter-cyclicality of the labor income share in the overall economy seems to be led by the service sector, since the service sector’s moving correlation is located below that of the manufacturing sector. This study argues that aggregate demand management policies alone (which have traditionally been used to stabilize economies) may not be effective in the current crisis and argues that they should instead be implemented alongside labor market policies such as work sharing programs.