The Labor Market Response tothe Financial Crisis
Ryoichi Imai

1

Impacts on Unemployment• The Crisis 2008 had a even larger negative
impacts on GDP of Japan and Germany than ofUSA.
• However, the rise in the unemployment rate islarger in US than in Germany or Japan.
• In terms of the unemployment rate, Japan’s
performance is almost the best.
– The best player is Korea!

2GDP and Unemployment

3

Unemployment Rate2007:
US: 5%;
Japan: 3.5%
Germany: 10%
Unemployment Rate
2009:US 10%;
Japan 5%Germany 9%4

Employment Adjustment Subsidy (EAS)• In 2009, Japanese Government spent 653 billion yen
to financially support business to temporarily layoff
their employees during the recession ‐ in the sensethat a portion of the layoff benefit is paid by thegovernment.
• EAS does not force private business to maintainemployment, since it is a financial support scheme
for business that will expand employment once therecession is over.

5

Employment Adjustment Subsidy

6Myths of EPL(employment protection legislation)• Japan is in the group with strong employment
protection– False.

• Strong employment protection leads to a highunemployment rate.
– False.

• Strong employment protection leads to a higher ratio
of non‐regular employment to regular one.
– True.

7

One More Myth• Gap in EPL between regular and non‐regular
employment leads to a higher rate of youth
unemployment.
– False.

• Source: http://www5.cao.go.jp/j‐j/wp/wp‐
je09/pdf/09p03012.pdf

8

International Comparison ofEmployment Protection Legislation (EPL)

Japan is in the group with weak employment protection legislation.
9

EPL and Unemployment
Flow-out

UnemployedEmployedFlow-in•EPL reduces the flow-in to unemployment.
•But it makes the labor market less attractive toemployers, which reduces the flow-out as well.
•Therefore, the whole effect is ambiguous.
10

EPL and Non‐regular Employment

With strong EPL, the ratio ofnon-regular employment tends to be high.

11Gap in EPL between Regular and Non‐regular Employment

Those countries with red points have strong EPL both inregular and non-regular employment. Japan is in thegroup with weak EPL in both the categories.
12Gap in EPL does not matter

The red points of Figure (1) are scattered in Figure (2), which implies
that there is no significant influence of the gap in EPL between regularand non-regular employment on youth unemployment rate and theduration of unemployment.
13

GDP is not a good measure of business
cycle• Narayana Kocherlakota, Presidentof Fed Minneapolis, argues:–Unemployment rate should replace
GDP as an appropriate measure ofbusiness cycle.

14Aggregate risks should be shared evenly byall people• For example, consider the latest recession. During thefour quarters from June 2008 through June 2009, percapita gross domestic product in the United Statesfell by roughly 4 percent.
• In a model with no asset market frictions, all people
share this proportionate loss evenly and all lose twoweeks’ pay. Such a loss is certainly noticeable.
• However, I would argue that it is not a huge loss.
• Put it this way: This scale of loss means everyone in
the United States ends up being paid in June 2009 thesame (inflation‐adjusted) amount that they made inJune 2006.
15Imperfect Insurance• However, the models with asset market frictions(combined with the right kind of measurement frommicroeconomic data) make clear why the above
analysis is incomplete.
• During downturns, the loss of income is not spread
evenly across all households, because some people
lose their jobs and others don’t.
• Because of financial market frictions, the insurance
against these outcomes is far from perfect (despite
the presence of government‐provided unemploymentinsurance).

16

Concentration of risks is bad• As a result, the fall in GDP from June 2008 to June2009 does not represent a 4 percent loss of income
for everyone.
• Instead, the aggregate downturn confronts many
people with a disturbing game of chance that offers
them some probability of losing an enormous
amount of income (as much as 50 percent or more).
• It is this extra risk that makes aggregate downturns
so troubling to people, not the average loss.

17

Unemployment rate
is a better measure• This way of thinking about recessions changes one’s
views about the appropriate policy responses.
• Good social insurance (like extended unemploymentbenefits) becomes essential.
• Using GDP growth rates as a way to measurerecession or recovery seems strained. Instead,
unemployment rates become a useful (albeitimperfect) way to measure the concentration ofaggregate shocks.

18

Labor Market Debate
John Quiggin VS Brian Caplan

19The Labor Market Rigidity andUnemployment• Since Lazear (1990), the leading view says thata more flexible labor market creates more jobs
than a more rigid one.
• The labor market rigidity means:– Higher unemployment benefits– Stricter employment protection– Less flexible wage adjustment

20Europe V.S. America• A consequence of the labor market rigidity is ahigher average unemployment rate with lessjob loss during recessions.
• The American labor market has:
– Advantage: a higher average unemployment rate
– Flaw: less stable employment• The advantage of the US labor market seems
to be lost in the current crisis.

21

U.S. Unemployment Now As High as Europe(Schmidt, Rho, and Fremstad)22

Bet with Bryan Caplan, Year 2(2011 update)• Back in 2009, I made a bet with Bryan Caplan, withthe winning condition for Caplan being that “theaverage Eurostat harmonised unemployment rate for
the EU‐15 over the period 2009‐18 inclusive should
exceed that for the US by at least 1.5 percentage
points.
• The EU‐15 average rate was slightly below the USrate for 2009, and slightly above the US in 2010, so,for the first two years, the difference averages out tonear zero.
– http://crookedtimber.org/2010/12/04/bet‐with‐bryan‐
caplan‐year‐2/23

My bet with Bryan Caplan(2012 update)• First the numbers. Until now, I’ve been consistently ahead.
EU‐15 and US unemployment rates were very close during
2009 and 2010. A gap has opened up in the last few months
and is now about 1.5 per cent. Given the dismal prospects for
the EU economy in the coming year, and the likelihood ofsome kind of recovery in the US, I expect to be losing groundon the bet this year, and probably for a couple of years afterthat.
– http://johnquiggin.com/2012/01/17/my‐bet‐with‐bryan‐caplan‐
update/24