We're guessing that Hermann Gartner and Christian Merkl won't be invited to too many labor union tannebaum trimming parties, thanks to their findings of the benefits of non-sticky wages
Without the wage moderation before the Great Recession , the German miracle would have been impossible. This is a point that is often ignored in the German public debate. The German Hartz reforms, which made the unemployment benefit system less generous, were certainly one of the reasons for the wage moderation. The reform was initiated in 2002 by a governing coalition, led by chancellor Schröder and the ruling Social Democrats. For some reason the Social Democrats are currently ashamed of this reform. If only they were to look at the facts from the Great Recession, they would surely be proud.
Which they've followed up with
This column has argued that sclerosis and large volatilities may be two sides of the same coin. The connection is clear-cut in theory. The data for Germany and the US from 1980 to 2004 support this story and cross-country evidence points into the same direction. Obviously, the labour market experience in Germany and in the US during the Great Recession (2008/2009) tells a completely different story as the volatility of the labour market in Germany was small (i.e. (un)employment was basically flat). But, as Gartner and Merkl (2011) argue, this may be due to a transition period in Germany caused by the labour market reforms and the ensuing wage moderation. The trend of declining equilibrium unemployment was offsetting the effect of the adverse macroeconomic shock. There are signs that the transition period is coming to an end. Germany may be back to normal soon. Thus, we expect that future recessions are associated with job losses again.
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