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Labor Adjustment Under Different Institutional Structures: A Case Study of Germany and the United States

Author

Listed:
  • Susan N. Houseman

    () (W.E. Upjohn Institute for Employment Research)

  • Katharine G. Abraham

    (Bureau of Labor Statistics)

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.

Suggested Citation

  • Susan N. Houseman & Katharine G. Abraham, 1994. "Labor Adjustment Under Different Institutional Structures: A Case Study of Germany and the United States," Upjohn Working Papers and Journal Articles 94-26, W.E. Upjohn Institute for Employment Research.
  • Handle: RePEc:upj:weupjo:94-26
    Note: A revised version of this paper appears in F. Butler, et al., eds. Institutional Frameworks and Labor Market Performance: Comparative Views on the U.S. and German Economies. London: Routledge, 1995. Please cite the revised version.
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    1. Burdett, Kenneth & Wright, Randall, 1989. "Unemployment Insurance and Short-Time Compensation: The Effects on Layoffs, Hours per Worker, and Wages," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1479-1496, December.
    2. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
    3. Topel, Robert H, 1982. "Inventories, Layoffs, and the Short-Run Demand for Labor," American Economic Review, American Economic Association, vol. 72(4), pages 769-787, September.
    4. Katharine G. Abraham & Susan N. Houseman, 1994. "Does Employment Protection Inhibit Labor Market Flexibility? Lessons from Germany, France, and Belgium," NBER Chapters,in: Social Protection versus Economic Flexibility: Is There a Trade-Off?, pages 59-94 National Bureau of Economic Research, Inc.
    5. Lawrence F. Katz & Bruce D. Meyer, 1990. "Unemployment Insurance, Recall Expectations, and Unemployment Outcomes," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 973-1002.
    6. Soltwedel, Rudiger, 1988. "Employment problems in West Germany - the role of institutions, labor law, and government intervention," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 153-219, January.
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    Citations

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    Cited by:

    1. Klinger, Sabine & Wolf, Katja, 2008. "What explains changes in full-time and part-time employment in Western Germany? : a new method on an old question," IAB Discussion Paper 200807, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    2. Glosser, Stuart M. & Golden, Lonnie, 1997. "Average work hours as a leading economic variable in US manufacturing industries," International Journal of Forecasting, Elsevier, vol. 13(2), pages 175-195, June.
    3. Kolko, Jed & Neumark, David, 2010. "Does local business ownership insulate cities from economic shocks?," Journal of Urban Economics, Elsevier, vol. 67(1), pages 103-115, January.
    4. Reich, Michael, 2012. "The Rising Strength of Management, High Unemployment and Slow Growth: Revisiting Okun’s Law," Institute for Research on Labor and Employment, Working Paper Series qt8sc8s1z1, Institute of Industrial Relations, UC Berkeley.
    5. Uwe Jirjahn, 2008. "On the Determinants of Shift Work and Overtime Work: Evidence from German Establishment Data," British Journal of Industrial Relations, London School of Economics, vol. 46(1), pages 133-168, March.
    6. Lacroix, Robert, 1997. "Mondialisation, emploi et chômage," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(4), pages 629-641, décembre.
    7. Milan Vodopivec, 2004. "Income Support for the Unemployed : Issues and Options," World Bank Publications, The World Bank, number 14922.
    8. Lusine Lusinyan & Leo Bonato, 2007. "Work Absence in Europe," IMF Staff Papers, Palgrave Macmillan, vol. 54(3), pages 475-538, July.
    9. Mares, Isabela, 1996. "Firms and the welfare state: the emergence of new forms of unemployment," Discussion Papers, Research Unit: Economic Change and Employment FS I 96-308, Social Science Research Center Berlin (WZB).
    10. McGinnity, Frances & Mertens, Antje, 2002. "Fixed-term contracts in East and West Germany: Low wages, poor prospects?," SFB 373 Discussion Papers 2002,72, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    11. Eger, Thomas, 2003. "Opportunistic termination of employment contracts and legal protection against dismissal in Germany and the USA," International Review of Law and Economics, Elsevier, vol. 23(4), pages 381-403, December.
    12. Achyuta Adhvaryu & Amalavoyal V. Chari & Siddharth Sharma, 2011. "Firing Costs and Flexibility Evidence from Firms' Employment Responses to Shocks in India," Working Papers WR-901, RAND Corporation.
    13. Wolfgang Pointner, 2006. "Employment Protection Regulations and Their Impact on Employment," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 44-57.
    14. repec:cdl:indrel:qt35g487jh is not listed on IDEAS

    More about this item

    Keywords

    labor; adjustment; layoffs; Germany; work; hours;

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J83 - Labor and Demographic Economics - - Labor Standards - - - Workers' Rights

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