Solving America's Unemployment Crisis One Vacation Day at a Time

In this posting, I want to compare the economies of both Germany and the United States with an emphasis on unemployment and a possible solution to America's stubborn unemployment problem.

Let's start with a graph showing the quarterly growth rate of Germany's economy since the beginning of the Great Recession:

  

Since Germany's economy began to rise from the ashes of the Great Recession in early 2009, it has grown at an average quarterly rate of 0.53 percent.   Growth peaked at 2.0 percent in early 2010 and hit a low point of -0.5 percent in mid-2012.  One would hardly call Germany's economic growth since the end of the Great Recession "robust" but not overly surprising given the weakness of the Eurozone as a whole.

Now, let's look at a graph showing the quarterly growth rate of the U.S. economy since the beginning of the Great Recession:

Since the American economy recovered from significant negative growth during the Great Recession in mid-2009, it has grown at an average quarterly rate of 0.95 percent.  Growth peaked at 1.5 percent in early 2011 and hit a low point of -0.2 percent in early 2014.  It is, however, key to note that Germany's economy grew at about half the rate as the American economy did over the same timeframe.  Despite the fact that Germany's economy is the powerhouse of Europe, we can quickly see that it is hardly the picture of health

Now, let's look at how Germany's unemployment picture has improved since the beginning of the Great Recession as shown on this graph:

As the Great Recession was entrenching itself in the world economy, Germany's unemployment rate was at 8.2 percent.  It hovered between 7 and 8 percent over the duration of the Great Recession when it began to drop, hitting its low (and current rate) of 5 percent at the end of 2013.

Now, let's look at how the United States unemployment picture has improved since the beginning of the Great Recession as shown on this graph:

From its peak of 10 percent in October 2009, the unemployment rate has fallen to its current level of 5.8 percent.

What we are seeing is that, although Germany's economic growth has been modest at best compared to the growth rate of the American economy since the end of the Great Recession, its unemployment rate is lower than the United States.  Why is this the case?

1.) It's not because Germans are dropping out of the work force:

Here is a graph showing the trends in employment in both Germany and the United States over the past decade:

Notice that the American employment rate (in red) fell substantially during the Great Recession and has not recovered.  In contrast, Germany's employment rate (in blue) kept rising right through the period during and after the Great Recession and is now around 5 percentage points higher than the U.S. employment rate. 

2.) It's not because of changes to the employment-to-population ratio:

Here is a graph from FRED showing the employment-to-population ratio for both Germany and the United States until 2013:

The employment-to-population ratio measures the proportion of a country's working age population that is employed.  While Germany's employment-to-population ratio has risen over the past decade and a half, the American ratio has fallen, and, as shown here, has remained stubbornly low since the end of the last recession:

As you can easily see, the employment-to-population ratio in the United States has stalled at levels not seen for decades, in fact, we have to go all the way back to 1984 to see the ratio as low as it is today.  This means that the growth rate in employment is being outstripped by the growth rate in the population.  

From both of these, we can see that Germany's unemployment issues since the Great Recession have not been "cured" by unemployed workers simply disappearing from the official unemployment database as is the case in the United States.  As well, as noted above, we cannot attribute Germany's improved employment situation to stellar economic growth rates.

Now, let's switch gears for a moment and look at two key labor force differences between the two nations.

1.) Average number of hours worked annually:

From the OECD database, here is a graph showing the average number of hours worked in a year for all OECD nations in 2013 in alphabetical order:

Notice that German workers spent, on average, 1388 hours at work in 2013.  This compares to 1788 hours for an average American worker.  In 2013, German workers spent an average of 22.4 percent less time at work than their American counterparts.  If you look through the data for both nations going back to 2000, this is what you find:

Over the past decade and a half, there is a firm trend showing that German workers have spent substantially less time at work than their American peers.

2.) Annual paid vacation and paid holidays:

As shown here, we can easily see that American workers have the lowest number of statutory paid vacation and paid holidays in the OECD and get 20 days less statutory paid vacation and 10 days less paid holidays than their German counterparts:

Given that trillions of dollars of monetary policy and government spending have done little to really solve America's stubborn employment issues, is it possible that simply spreading the finite amount of work around (i.e. work sharing) is the answer to the current American employment crisis?  Germany's success at battling unemployment would suggest that there is a mechanism by which the economy is able to distribute available work among more workers.